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Home > Pension Arrangements and Membership

1.0 Introduction

This section of the Guide, the starting point, will help readers gain a basic understanding of the main types of pension provision available in the UK.

The detail covered includes basic information about the current position of:


State Pensions and the State Second Pension scheme




Final Salary schemes, Defined Contribution schemes (i.e. money purchase schemes),  hybrid arrangements, unapproved arrangements, personal pension schemes and Stakeholder pensions


centralised schemes


types of retirement option


Total Pension Input (Annual Allowances)


additional voluntary contributions and free-standing voluntary contribution schemes 


types of pension provision in the UK


voluntary membership and automatic membership, and


overseas members and temporary absence.


A fundamental requirement for membership of a workplace pension scheme is that the individual is regarded by the law as an employee of an employer either running or participating in the pension scheme. This is also a fundamental first requirement before the tests for eligibility for automatic enrolment are applied [see 25.2].

In most cases determining whether a person is employed by the employer will be straightforward. However, over the past few years changes in the structures of employment relationships have muddied the waters, particularly in two areas:


people providing services to one employer through a service company of which they are the owner, set up by them to ‘sell’ their services alone


people working for one employer under a contract which imposes terms on how and when they work that are similar to those that would apply to an employee, but which claims that they are self-employed contractors and so not entitled to the employment benefits such as holiday, sick pay and pension scheme membership that would be available to an employee. This latter category is frequently referred to as the ‘gig economy’ and is frequently to be found in businesses such as taxis and couriers.

In the former category, individuals concerned seek to have their tax and National Insurance contributions bases assessed on the basis that the worker is the company providing the services, and so therefore the corporate tax rules should apply, rather than those applicable to individuals. HMRC considers that in many cases this goes against at least the spirit, and perhaps the letter, of the relevant tax rules. Those rules are set out in HMRC’s Guidance ‘Off-payroll working through an intermediary IR35’. Consequently, the rules are currently being reviewed.

In the latter category, the beneficiary of the arrangement is the employer, which is able to introduce a greater degree of flexibility over the use of its workers, and does not have to provide a number of benefits required for employees. A number of cases in recent years have sought to clarify the tests used to determine whether an employer/employee relationship exists. The most recent is the case of Pimlico Plumbers Ltd & Another v Smith, decided in the Supreme Court in June 2018. It seems that central issues for consideration include such things as:


a requirement for the individual to undertake the work personally, with no substitution permitted,


a requirement to be exclusively available for work for a set number of hours and


the degree of control exercised over the way in which the individual works, such as requirements over use of company-provided transport and uniform.

The position is complex, and legal advice should be sought for any case where there is any uncertainty.


The need to know about State Pension arrangements

Initially there were three principles related to the provision of State pension in the UK: earnings-related contributions, an earnings-related pension and opportunity for individuals to contract out. These principles were established in 1961 through the Graduated Retirement Benefit Scheme. When this closed in 1975, the State Earnings Related Pension Scheme (SERPS) took over from April 1978 (under the Social Security Pensions Act 1975, subsequently re-enacted as the Pensions Schemes Act 1993).

In 1988, the Social Security Act 1986 brought in changes to SERPS and also gave Defined Contribution schemes the opportunity for the first time to contract-out and provide their members with Protected Rights (the statutory money purchase benefit in lieu of the Additional Pension paid by the State). This was followed in 1997 by the Pensions Act 1995, under which the government offered Defined Benefit schemes the opportunity to contract-out on the Reference Test basis or alternatively to provide Protected Rights for their members, both in place of Guaranteed Minimum Pension (GMP), which ceased to accrue for service after April 1997.

Thereafter, the necessity for trustees and managers of pension schemes to have a greater understanding of the statutory public pension arrangements moved forward again.


Stakeholder Pension arrangements (Defined Contribution only) were introduced from April 2001 bringing in obligations on employers to facilitate voluntary access to occupational pension provision [see 1.13]. Such arrangements (or their equivalent) ceased to be compulsory on employers effective 1 October 2012 [see (v) below].


The State Second Pension Scheme (S2P) – the replacement for the State Earnings Related Pension Scheme (SERPS) – commenced on 6 April 2002 giving NI payers opportunity to continue to contract out.


The benefit structure of the new State Second Pension (S2P), and the then-current contracting-out terms, suggest that for contracted-out money purchase schemes the decision to contract-out should be laid at the feet of individuals rather than directed by employers.


Effective 6 April 2012, the government abolished contracting out for Defined Contribution schemes as part of its plans to streamline pensions regulations [see 1.8.9].


Effective 1 July 2012 (originally to be 1 October 2012), employers became responsible, under a staged programme starting with the largest employers (those with a workforce of over 120,000) and continuing up to April 2017 for smaller employers for automatically enrolling qualifying jobholders into an employer-sponsored qualifying scheme or into either the National Employment Savings Trust (NEST) [see 1.27.6] or a similar, qualifying, auto-enrolment scheme [see 1.27.6 (Note)]. From 1 October 2012 employers ceased to be responsible for observing the Stakeholder Pension regulations [see 1.13].


Effective 6 April 2016 the dual-level state pension was replaced with a new, single, flat-rate state pension, called simply the State Pension, to be paid to all who retire after that date. Since the second-tier state pension ceased, from that date the last remaining option to contract out on a Defined Benefit basis also ceased. For those retiring on or after 6 April 2016 having accrued at least some rights under the previous state arrangements there will be some transitional protections.

BREXIT and other constitutional issues

The referendum on 23 June 2016 resulted in a vote for the UK to leave the European Union (known colloquially as ‘Brexit’). Following more than four decades of the UK’s membership, first of the Common Market and gradually morphing through to today’s political organisation, the effects are likely to be significant across the whole of the UK (as well as the remainder of the EU and other parts of the world) and felt in all areas.

UK pension schemes will no doubt be affected, certainly financially (plunging gilt yields pushed up DB scheme deficits shortly after the vote and a substantial fall in the value of sterling compared to most other currencies re-set economic norms for schemes), but also in respect of the rules and regulations that apply to them. A number of such rules – for example the sex equalisation rules that were kicked off in the UK by the European Court of Justice case of Barber v Guardian Royal Exchange in 1990 – have become entrenched in UK law through having been followed and applied in UK courts, and the principles incorporated into statute (such as the Pensions Act 1995). It is possible that some of the decisions on the periphery may be changed in future cases, but it is unlikely that the core rules will change.

Other legislation that has been driven by the EU, through Directives – such as the scheme-specific funding regime for DB schemes – has been adopted into UK legislation and would have to be specifically removed in future by a parliament that will be heavily engaged in repealing laws in many other areas. Consequently, it is unlikely (unless an issue is extremely urgent) that pensions will be amended for some considerable time.

In order to ensure that the law continues to operate effectively during the long process of reorganising UK law to operate independently of any unwanted EU laws going forward, the Government has announced its intention to introduce a Great Repeal Bill, to incorporate into UK law all EU-connected law affecting the UK, following which it will be reviewed over time.

Article 50 of the Treaty of Lisbon – the provision that starts the two-year exit process – was triggered on 29 March 2017.

There is also a strong opposition in Scotland, whose citizens voted strongly in favour of remaining in the EU. There are calls for a rerun of the 2014 Scottish Independence referendum, with the intention of Scotland returning to EU membership if it gains independence from the rest of the UK. That would clearly have an immediate and significant impact on UK pension schemes, many of which have members both in Scotland (which would then not only be a separate country, but also an EU member) and in the remainder of the UK. The results would make the devolved powers of Scotland to set their own tax rates, effective from April 2016, seem very mild in comparison.

Meanwhile, the UK is still a member state of the EU and it is ‘business as usual’. Any Directives, Regulations and other instructions from the EU still have to be adhered to, and cases involving questions on the interpretation of EU law are still being referred by UK Courts to the Court of Justice of the European Union. However, complications are in the pipeline. For example, in August 2016 the latest Directive on Institutions for Occupational Retirement Provision (known as ‘IORP II’) was published, and came into force on 12 January 2017. With a two-year window in which Directives have to be adopted by member states, this means that it is not clear in the light of the Article 50 window whether the UK will adopt it or not – and if it does, to what extent.  

So, in the short term it seems unlikely that there will be much, if any, direct effect on UK pension schemes from Brexit. However, The Guide will reflect any changes that do occur, as they happen.

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