UK/EUROPE - The European Commission has confirmed employees can be auto-enrolled into contract-based group personal pensions (GPPs) when the new personal accounts regime comes into force in 2012.

The Pensions Bill 2007 was written to introduce personal accounts and included a measure allowing employees to be automatically enrolled into "good" existing employer pension schemes, such as GPPs.

However, while the Bill allowed automatic-enrolment into trust-based schemes there were concerns two European consumer protection directives  - the Distance Marketing Directive (DMD) and the Unfair Commercial Practices Directive (UCPD) - would have prevented employees from joining a contract-based GPP without actively opting-in.

James Purnell, secretary of state for work and pensions, has now confirmed the government will amend the Pensions Bill 2007 to allow automatic enrolment into workplace personal pensions (WPPs) - which include GPPs, group stakeholders (GSHPs) and group self invested personal pensions (GSIPPS) - following confirmation from the European Commission that it would be "consistent with EU law".

Purnell said: "At present, around £6.7bn (€8.4bn) is saved into WPPs annually by some three million employees, making it the second-largest form of private sector pension membership in the UK.

"There are currently 4.7 million people who work for a company with a WPP and are not members. This will extend the benefits of automatic enrolment to millions more people - giving them the means to save for their retirement for the first time," he added.

Since the proposals to auto-enrol members into pensions were first announced, the industry has highlighted there is potential risk of employers "levelling down" their existing scheme to personal accounts if GPPs could not operate auto-enrolment. (See earlier IPE story: Pensions Bill fails to address auto-enrolment)

Possible solutions to the problem - should the EU have ruled the proposals breached existing directives - included streamlined joining, which would have required people to sign one piece of paper after joining the scheme, and the establishment of master-trust schemes.

Mike O'Brien, pensions reform minister, said: "We have worked hard with industry representatives and the European Commission to ensure we get this right and we are delighted with the outcome.

"A wide range of stakeholders supported our discussions with the Commission, which is a testament to the consensus we've managed to build around the Pension Commission reform package," he added.

As part of this consensus, organisations including the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) issued a letter to the European Commission in February supporting auto-enrolment into WPPs.

Stephen Haddrill, director general of the ABI, said the clarification will "ensure that saving through workplace pensions continues to grow".

"The EU has made the right decision. This issue had been the elephant in the room for far too long and now it has been resolved, we can move forward," added Joanne Segars, chief executive of the NAPF.

John Lawson, head of pensions policy at Standard Life, said the decision was a "sensible conclusion to a protracted negotiation" as the EU directives were never intended to stop employees joining company schemes, and he urged the government not to wait until 2012 but to bring auto-enrolment "into force at the earliest possible date".

AEGON also agreed the move was a "very positive step forward, as Rachel Vahey, head of pensions development, claimed "denying contract-based schemes the ability to implement automatic enrolment could have forced their closure, leaving millions worse off in retirement".

"This would have been completely against the government's stated aim of protecting good existing schemes. We have to remember the aim of pension reform is to get more people in a fit financial position to move into retirement. This means more people saving more money in good existing pension schemes or, where there isn't one, in personal accounts," she added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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