News
This is an update to our February bulletin on personal accounts.
Auto Enrolment
The Department for Work and Pensions has now consulted on how auto-enrolment will work for employers (the consultation ran until 3rd June).
As explained in our first bulletin, the Government are proposing that employers must automatically enrol employees aged between 22 and state pension age who are not members of a “qualifying pension scheme” into a Personal Account from the first day that they meet the criteria. They have now proposed that the regulations will allow a 90 day waiting period for employers offering “better quality schemes” – including group personal pension schemes. However total contributions to such schemes will have to be at least 11% of earnings (including a 6% employer contribution), rather than 8% (including 3% by employers) to the Personal Accounts scheme or an exempt scheme which does not have a waiting period.
Earnings
Contributions to Personal Accounts will be based on earnings between the primary earnings threshold for 2006/07 of £5035 and the upper earnings limit of £33540, revalued in line with national average earnings, which may therefore include overtime and bonus payments. This is different to most existing schemes, which may for example make contributions based on basic pay only and therefore employers (or their advisers) will have to make sure that contributions paid to existing schemes are at least equal to the required contributions to Personal Accounts.
The Personal Accounts Delivery Authority have proposed that employers will be allowed to “self certify” that contributions based on a different earnings definition will nevertheless meet the minimum requirements over a “pay reference period” of one year. This will help, but will not change the need to keep good records and perform laborious reconciliation calculations, and therefore employers may wish to consider changing the way contributions are calculated to match the basis used by Personal Accounts.
Contributions
The contribution cap for the personal accounts scheme will be £3600 per year “in 2005 money”. This will probably increase to around £4500 by 2012. The Government considered increasing the cap to around £10000, but have decided not to proceed with this, as it may have undermined existing schemes and is not in accordance with the target market: low to medium earners with little or no pension provision.
No transfers in or out of personal accounts will be allowed.
Both issues will be reconsidered in 2017.
Retirement Options
PADA assume that a lifetime annuity will be appropriate for most scheme members, although it is expected that other options will be available, and this could include transferring to another pension scheme from age 55 in order to take alternative retirement options.
Members will be encouraged to use the “open market option”, otherwise it is proposed that a simplified “focused” annuity choice can be obtained from the scheme from a chosen panel of providers.
The scheme aims to keep costs down and make retirement a “largely self-service customer experience”. The scheme will provide generic information on retirement options, but will draw members’ attention to the need to take advice.
Charges
No decisions have been made yet. The Government will need to balance its aim to create a low cost scheme with the need to comply with European rules and not unfairly disadvantage other pension schemes.
Investment
PADA are still consulting on investment choice. Low cost is likely to be the key driver and therefore there may be restrictions on fund availability and switching. The default fund is likely to be invested very cautiously.
Choices for employers
Many commentators expect employers to cut back on salary increases over a period of time to help pay for the increased pension liabilities.
We recommend that you consider your options well before 2012. These include:
(1) Continue with and (perhaps) adapt an existing scheme
(2) Continue with an existing scheme alongside personal accounts for particular employee groups
(3) Close existing scheme and “level down” to personal accounts (but what about higher paid employees?)
As we explained in our first bulletin, there is no provision for any personal advice within the Government’s plans. We believe (naturally) that the private sector will provide better quality information and more options to scheme members than will be available from the personal accounts scheme. We consider our role will be to help employers administer their scheme in a compliant manner, and offer employees both generic and personal advice on retirement planning and their retirement options. You need to decide how important such a service will be to you and your employees.
Please contact us if you have any questions, need more information, or perhaps would like a meeting to discuss matters further.