Gov't denies policy u-turn on personal accounts
UK - The government has rejected industry accusations suggesting it has performed a "policy u-turn" and is "destroying" existing pension provision by ignoring pensions industry proposals for a principles-based approach to contribution levels.
UK organisations including the Association of British Insurers (ABI), the National Association of Pension funds (NAPF) and the Confederation of British Industry (CBI) have been in ongoing discussions with the Department for Work and Pensions (DWP) over the definition of "qualifying earnings" since the Pensions Bill was published in December 2007.
It was feared that the rules set out in the Pensions Bill could cause some employers to try and avoid the administrative and cost burden of checking every contribution by closing existing schemes and enrolling them into personal accounts, or altering the terms of their schemes by adopting the same definition of pensionable earnings as the new system.
This is because existing pensions contributions under current legislation are generally a percentage of employees' basic pay, but personal accounts would in future require an 8% contribution of total banded earnings of between £5,035 and £33,540 (in 2006 earnings terms) including bonuses and overtime.
But these fluctuations would increase the administrative burden on employers to conduct checks every time a payment is made and where necessary top up any shortfalls, according to pensions experts.
In July, Mike O'Brien, minister for pensions reform, confirmed the Pensions Bill would be amended, if necessary, to allow employers to continue using their existing methods of calculations for pension contributions and introduce an annual reconciliation test. (See earlier IPE article: Pensions Bill may be amended to include earnings test)
The industry had been pushing for the introduction of a principles-based approach, where "good" employers with contributions of 8% or more of basic earnings would certify that the "vast majority" of their employees would be better off under the existing arrangements than they would be in the personal accounts scheme.
UK life and pensions providers Standard Life said this test would have allowed schemes to continue using their existing definitions of pensionable earnings and would have been performed every three years to reduce the administrative burden on employers.
But the DWP has now rejected this suggestion as some individuals could lose out on contributions, and is instead pressing ahead with amendments to the Pensions Bill to allow employers to continue calculations on basic earnings but with annual reconciliation tests to ensure the minimum level of saving is met for each individual.
John Lawson, head of pensions policy at Standard Life, said: "Millions of low earners are set to lose out as a result of the government's failure to listen to concerns on this issue. The government has repeatedly claimed it wants personal accounts to complement rather than compete with existing pension provision, but this appears to be nothing more than empty rhetoric."
"In fact, the opposite would appear to be true. The government appears to be hell-bent on destroying existing provision rather than protecting it," he added.
In response, a spokesman for the DWP said: "We have not shut the door on further changes, and discussions are continuing with stakeholder groups, But some of the alternatives suggested to us thus far would undermine employees' minimum level of pension saving.
"It is not the method of calculation that counts but the overall value of contributions. We propose to amend the Pensions Bill to clarify this, and to allow the value of contributions to be assessed over a period of up to a year to allow for workers with fluctuating wage packets," he added.
Rachel Vahey, head of pensions development at AEGON UK, said the decision was a "missed opportunity and could be done better" as she warned the pension reform agenda will have failed if the change results in fewer people saving or not saving enough because employers switch to personal accounts.
She said: "We understand the principle but it's the application of it that is the problem. The industry proposals are looking at it as the greater good, where the vast majority will be better off but a few will lose out. But under the DWP's plans, people - especially women and low earners - will still lose out in real terms. There is just not a wide enough view of who will lose out underneath this approach."
However the DWP spokesman added: "There is no reason for employers to make any changes as long as their existing arrangements result in contributions of at least equal value to those required by the Pensions Bill. Moving staff into personal accounts would not remove this obligation or make the calculation any simpler for employers - they would still have to ensure overall contributions were of sufficient value."
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