UK - The Trade Union Congress (TUC) has urged the government not to give into pressure from the pensions industry to "water down" the qualifying earnings test to allow existing occupational schemes to be exempt from personal accounts.
In a letter to Mike O'Brien, the minister for pensions reform, the TUC warned the Pensions Bill should include a broad definition of pay, as otherwise "there is the potential for unscrupulous employers to try to redefine part of the wage packet as a bonus or other non-qualifying element of pat to reduce their pension contribution".
The exemption for existing schemes from the new system of personal accounts, scheduled for 2012, currently requires employers to show they are making minimum contributions that are at least as good as the 8% of banded earnings - 4% employee, 3% employer and 1% tax relief - provided by personal accounts.
However, the issue of what constitutes banded earnings has raised concerns among the industry as the Pensions Bill states existing schemes should take into account bonuses, allowances and overtime when calculating pension contributions, while at the moment most schemes base contributions on basic earnings.
As a result, the pension industry has warned the extra administration and costs involved in ensuring the existing scheme meets the 8% level means many schemes could "level down" contributions, or close their scheme altogether and adopt personal accounts.
Following the concerns, the government and members of the pension industry have been engaged in discussions to find a solution, however while the government intends to introduce an annual reconciliation test, rather than monthly, and to allow existing schemes to continue using basic earnings in calculations, it has rejected the industry's suggestions for a principles-based approach. (See earlier IPE article: Gov't denies policy u-turn on personal accounts)
The TUC has now supported the government's decision and urged O'Brien to "resist pensions industry lobbying to water down the test", including the proposal to allow a proportion of scheme members to receive smaller contributions, as the majority would receive higher contributions.
Kay Carberry, assistant general secretary at the TUC, said in the letter the TUC is "worried that any move, even to meet legitimate problems, could have unintended consequences. Employers are already used to exploiting any potential loophole in tax legislation to minimise their tax bill and would do the same with pensions".
She pointed out the 8% total contribution - 3% from the employer - is a "bare minimum" and argued the phasing in of the requirement means it will not be onerous, so any scheme that does not meet the target for the great majority of its staff "is a very minimal, if not downright mean, scheme".
Carberry added: "We therefore strongly oppose any amendments to the Bill that would mean any employee was not getting this minimal 8% over the relevant earnings band. This would be a fundamental breach of the new pensions consensus. Acceptance of such a low contribution rate was a very significant compromise by the TUC, and we could not accept any exemptions."
However, the letter acknowledged the difficulties some defined contribution (DC) schemes might have with the current definition of qualifying earnings, and therefore gave its approval to an annual reconciliation test, as well as the use of employer top-ups to cover any annual shortfall resulting from "unusual circumstances".
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