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The trm Report - November 2007 With Personal Accounts on the horizon, what does the future hold for occupational pension provision? Introduction Approximately 50% of the UK working population are in occupational pension schemes. Of these about half are in private sector schemes backed by assets of approximately £1 billion* with the other half in unfunded public sector schemes with promises which will be met by the tax payer. The cost of these promised benefits is also thought to be around £1 billion. The aim of the introduction of the National Pension Saving Scheme, otherwise known as Personal Accounts, is to address the pension saving for the working population of the working population who have little or no funded pension assets. The aim is that all employees who are not members of suitable employer sponsored pension schemes will be included within Personal Accounts through auto-enrolment when the scheme is launched in 2012. The first seeds of this approach came with the introduction of stakeholder pensions in 2001 which gave most employees access to low cost pension provision through the workplace but without any compulsory employer or employee contributions. However, stakeholder pensions will not be the vehicle for Personal Accounts. Auto-enrolment will operate so that employees will be included within the scheme (and pay contributions) as a default and they will then have to elect to leave it if they don’t want to be members. The hope is that inertia will mean that large numbers of people who don’t currently save for a pension will do so. The National Pension Saving Scheme will be established as a defined contribution (money purchase) occupational pension scheme with the same level of regulation as other occupational pension schemes. A Delivery Authority is being established (under Chairman Paul Myners and Chief Executive Tim Jones) which will initially have an advisory role before acquiring responsibility for constructing the Personal Accounts scheme. Eventually the Delivery Authority will become a Personal Accounts Board with responsibility for launching and running the scheme. Key Features of Personal Accounts These can be summarised as follows:
Timeline Following a White Paper in December 2006 which invited consultation, and a summary of the responses to the consultation in June 2007, the Pensions Act 2007 received Royal Assent in July. In September 2007 an Advisory Personal Accounts Delivery Authority was established. A Pensions Bill is then expected to receive Royal Assent in 2008 and then in Autumn 2008 the Personal Accounts Delivery Authority will be given executive powers. There will be a clear objective to establish the infrastructure for Personal Accounts including auto-enrolment. They will be asked to deliver a scheme with low charges and appropriate investment choices, which minimises the burden on employers and supports existing provision. Associated Issues Generic Advice-Thoresen review The Aegon Chief Executive, Otto Thoresen is heading an independent review (which is due to report in early 2008), set up by the Treasury, to investigate how to provide generic financial advice to every adult in the UK ahead of the introduction of Personal Accounts in 2012. A series of pilot schemes to test new methods of delivering generic financial advice are being run, which are testing face to face, ‘phone and web based approaches. One issue is whether anything generic should be called advice. Would ‘information’ or ‘assistance’ be a better term? Under Treating Customers Fairly rules, where consumers receive advice, this has to be suitable and take account of their circumstances. It is difficult to see how anything generic can meet this test. As Personal Accounts will be trust based occupational schemes they will fall outside the scope of the Treating Customers Fairly rules in the Financial Services Authority’s Conduct of Business rules because regulation will be by the Pensions Regulator. Should the same principles not apply as far as possible to the design of Personal Accounts? Means Testing
Auto-enrolment
In practice, those who are auto-enrolled in Personal Accounts will need to understand that they may not be suitable for them and then take action to opt-out of the scheme if appropriate. This presents quite a challenge for the role of generic ‘advice’, particularly when a judgement needs to be made on what means tested benefits might look like by the time people come to take their benefits from the scheme. Salary Sacrifice
The extent to which salary sacrifice is threatened by the introduction of Personal Accounts is a matter of conjecture. Some hold the view that it would be illogical to allow salary sacrifice where pension provision is compulsory. With a 5% employee contribution required for Personal Accounts, it is argued that allowing salary sacrifice for all the new people saving through Personal Accounts would represent such a loss of income that the Revenue would not allow it. So will the government block salary sacrifice for mandatory contributions or will it even disallow it altogether? The latter would make flexible benefit programmes significantly less attractive for employers. In any event, flexible benefit programmes which do not require a compulsory pension contribution will need to be revisited before 2012. The rules for contributions and exemptions for existing schemes have not been finalised. So in the meantime substantial savings in National Insurance contributions can be made for schemes which already adopt this approach. It is trickier for employers who do not currently use salary sacrifice to decide whether to take advantage of this facility now in the knowledge that the scheme might have to be restructured in the foreseeable future. Further Possible Impact on Existing Schemes The National Association of Pension Funds (NAPF) has floated the idea of high quality existing schemes having a “Good Pensions Quality Mark”. The idea is for employers to be able to demonstrate that they are offering better value than the Personal Accounts minimum and for employees to identify employers offering a good pension. The government has indicated that they support this and that a quality mark would not be used to raise minimum standards. The government has also clarified the position for scheme qualification tests where the requirement will be on the employer to automatically enrol eligible employees into a qualifying occupational pension scheme. A defined contribution scheme will be certified on the basis of providing minimum contributions of 8% (including minimum employer contributions of 3%) on band earnings for each individual rather than compared with the average contribution going into the scheme, thereby avoiding members with high contributions cross-subsidising those with contributions below the minimum. A defined benefits scheme will need to meet a minimum benefit criteria test. Personal Pensions
These are not considered viable because legally no amendments to domestic law will nullify the application of European law. The government is considering the effectiveness of alternative joining mechanisms for work place personal pension arrangements that are compliant with European law to see whether this could provide a solution. It will be interesting to see if a pragmatic solution can be found. “Levelling Down” of Contributions The NAPF has suggested that the Delivery Authority is given the specific objective of optimising participation and saving among those in the workplace without a good pension. Imposing a cap on contributions is intended to enable the government to meet its aim of supporting existing schemes because if there were no cap then employers might choose to replace existing schemes with Personal Accounts. The government has concluded that a contribution limit of £3,600 (in 2005 terms) should help target Personal Accounts at moderate to low earners without access to employer-sponsored pension provision. In addition it has been decided that there will be no transfers in the early years and no additional features such as life assurance, which should also act as a disincentive to employers looking to level down into Personal Accounts. Charges
The Future The precise impact of the introduction of Personal Accounts on occupational pension schemes is still unknown because much of the detail is yet to be finalised. It is hoped that Personal Accounts begin to address their target market of those without funded pension provision and do not adversely impact upon existing good quality workplace schemes which should continue to play an important role in helping meet many peoples’ retirement income needs. The evolution of occupational pension schemes looks set to continue. Grant Lore |
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