UK - The UK government has confirmed it will amend the Pensions Bill 2008 at the next parliamentary stage, if necessary, to clarify the definition of qualifying earnings for a pension scheme and allow the introduction of an annual test.

Mike O'Brien, minister for pensions reform, said the government had "listened to concerns and made considerable progress" on the potential problems for using banded earnings in calculations for contributions rather than basic pay.

He has now confirmed "employers will be able to use their existing contribution calculations where these provide equivalent or better contributions than the minimum set out in the reforms, when assessed over a period of up to a year."

The planned introduction of auto-enrolment and personal accounts in 2012 has raised concerns among the pension industry over the exact details of the exemption test for existing schemes and what constitutes "qualifying earnings".

In order to be exempt from establishing a personal account, an employer needs to run a "good" pension scheme that contributes at least the same as personal accounts - 5% from the member and 3% from the employer.

However as most schemes take into account basic pay rather than a certain section of earnings - £5,035 (€6,338) and £33,540 - this means schemes either need to change their rules or undergo a comparison test.

As a result, industry bodies, including the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI), have proposed an annual rather than monthly reconciliation mechanism to "smooth" out any difference in pay over the year. (See earlier IPE article: Gov't targets annual reconciliation solution)

A debate in the House of Lords earlier this month revealed the government favoured this approach, and Mike O'Brien has now confirmed the current pensions bill could be changed to allow for the establishment of an annual reconciliation test.

"The government will bring forward amendments for the Lords Report stage, should these be necessary, to make this position clear and to facilitate an annual test," he said.

However, Rachel Vahey, head of pensions development at AEGON UK, said O'Brien's comments suggests the government still wants time over the summer to continue discussions with stakeholders and "explore the options a bit further".

She said: "What we're looking for is a workable solution that employers can base on current definitions of earnings. We don't want anything that disturbs these 'good' employers, like an annual reconciliation test, as it seems like we're just punishing the good guys."

Vahey admitted an annual test is better than the monthly test as previously proposed, however she warned "it still means a test and all the administration that goes with that".

Joanne Segars, chief executive of the NAPF, added: "It is important that existing schemes can administer the new rules easily and with no additional costs. However, the devil of how this will work will be in the detail."

The Pensions Bill 2008 has left the committee debate stage of the House of Lords, the UK's upper parliament, and will now be adjourned until October 6 2008 when it will be discussed in the House of Lords again at the report stage.

Vahey pointed out the government's policy on auto-enrolment and personal accounts would "not succeed or fail" on the actions of employers that already have pension schemes, but on those that have never provided a scheme for employees and never intended to.

She said: "Somewhere along the line we seem to have lost that perspective, and we can't risk losing the good employers that are already doing the right thing. There has to be a workable option out there which we can all agree on, preferably based on a definition of basic earnings.

"It's very positive that the government is engaging with the industry but it is important that anything we bring in just doesn't tweak the rules but actually solves the situation," added Vahey.

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