The UK government has introduced amendments to the Pensions Bill 2008 allowing employers to self-certify that their occupational schemes will meet a minimum standard, but experts have warned it may not be enough to stop employers ‘levelling-down' contributions.
In 2012 the UK plans to auto-enrol workers into qualifying occupational schemes and establish a new system of personal accounts, but as the minimum contribution to personal accounts is 8% of banded earnings - 4% employee, 3% employer and 1% tax relief - concerns have been raised that employers will switch from existing schemes with higher contributions to the new regime.
To avoid this the government intends to exempt ‘good' existing schemes that match or exceed the 8% contribution, but because the personal accounts minimum is based on basic pay, overtime, bonuses and commission, and existing contributions are normally calculated on basic pay only, experts claimed the administrative burden of checking contributions match could lead to employers levelling-down.
The solution proposed by the government is for employers to self-certify that the scheme meets the quality standard, which means they will not be required to make up any retrospective reconciliation in case of unexpected funding shortfall, unless the "detriment to an individual exceeds a minimum threshold".
John Lawson, head of pensions policy at UK life insurer Standard Life, pointed out that the conditions set out in the regulations will determine the tolerances that are allowed for the minimum threshold, but warned "if these are small then certification won't be of any use".
"If they are cast in the shape that was advanced earlier this year, for example allowing 8% of basic pay as a calculation as long as basic is 80% of total pay, then the new rule will be useful," he added.
Ros Altmann, an independent pension expert, admitted that the amendments suggest the government is trying to make it easier for employers. But she claimed: "The problems are so intractable that I am not convinced we will manage to avoid the levelling down that I believe to be inevitable."
Altmann highlighted that the regulations mean that employers only have to certify their scheme meets the minimum standards for the whole workforce once a year instead of once a week for each individual member, which could have been an alternative option.
But although this is a "big improvement", Altmann claimed the actual rules are so complicated there will still be problems for employers. "The calculation of personal account minimum contributions has to be based on basic pay plus overtime, bonus and commission. How will employers realistically be able to forecast what those are going to be for the next year, in advance?"
Altmann also warned as the rules for what constitutes "retrospective reconciliation" have not been published, "it seems there will still be risks that employers could find themselves falling foul of the rules if their predictions turn out to be wrong", for example if employees earn more commission or overtime than expected. "It sets up some complex decisions and may have unintended consequences," she said.
Rachel Vahey, head of pension development at Aegon UK, added: "We want to get to a position where employers who provide good schemes don't have to conduct yearly calculations or comparisons, and don't have to reconcile contributions. To do so would impose administration burdens on them, with the risk they seek the path of least resistance, move to a personal account definition of contributions, and level down to the detriment of lower earners." But she admitted: "We don't yet have all the information to know whether
we can achieve that outcome."
Lawson suggested the details of how ‘self-certification' will work will not be known until the regulations are laid - "probably in late summer or autumn next year", so he emphasised the need to "try to get some guidance out of the government in the meantime because employers revisiting their contribution structures are operating in a vacuum and in the absence of clarity over certification, they are very likely to opt for the certainty of band earnings".
But Altmann suggested many employers would prefer to switch to personal accounts because "they will not have to take any risk of certifying their existing scheme and, as almost all employers are already contributing more than the 3% of band earnings, they would be able to reduce contribution rates at the same time - making it pretty attractive".
"I can see the government is trying to improve things a bit and moving in the right direction, but I am not sure that they will succeed in overcoming the real problems," added Altmann.