UK -Professional bodies representing the UK pensions industry have collectively warned changes are needed to the current Pensions Bill because the current definition of ‘qualifying earnings' limit creates a benefits chasm between the proposed personal accounts and existing employer-based schemes.
A committee of members from the UK government's Upper Chamber - the House of Lords - are meeting today to discuss the Bill which is designed to set out legislation for the introduction of personal accounts in 2012.
However, a briefing document produced by the Association of British Insurers (ABI), The National Association of Pension Funds (NAPF), the Institute for Chartered Accountants in England and Wales (ICAEW) and the Society of Pensions Consultants (SPC) in advance of that committee meetings warns many members of existing pension schemes could see their pension benefits seriously curtailed should Clause 12 of the Bill apply the term ‘qualifying earnings' limit to all forms of pension scheme.
More specifically, officials point out existing defined benefit (DB) and defined contribution (DC) schemes pay contributions required based on an individual's total basic pay rather than on earnings of between £5,035 (€6,338) and £33,540, as proposed by the government.
Low-earners would be most affected, were this to continue as proposed, the collective has argued, as the likely impact is employers would feel obliged to alter the pension scheme's rules to match personal accounts as well as ‘level down' the benefits paid to existing pension scheme members to "legally guarantee" the amount will at least be the same.
It would also mean a member of a DC scheme and on average earnings of £24,000 a year is likely to see their pensionable income cut by £5,000 a year at retirement, according to the group.
As it stands, employers would be required to ensure contributions to both personal accounts and existing pensions schemes are at least equal to 8% of an employees full earnings between the two specified ‘qualifying earnings' limits.
However, evidence presented by the bodies indicates 83% of FTSE 100 companies use total basic earnings to calculate contributions required, and the average employer contribution to a DB scheme is 16% while the DC contribution is 6% of pay.
Once the employee's 4% of pay contribution is added, these contributions would be "materially above the minimum statutory contribution" required from 2012.
At the same time, terms of Clause 12 also specifies employers are required at every pay period to ensure the contributions to a pension made are equal to or greater than that required under this definition, and make ‘reconciliation payments" at that time if a gap occurs.
But this would create considerable administration and cost to the employer, so officials have instead proposed they be required to assess the value of earnings at the year end.
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