Importantly, the Bill also covers the interaction of Personal Accounts with the existing marketplace for pensions and benefits, and this is where it is of most interest to advisers.
The first disappointment is that there is still no resolution to the problem that prevents automatic enrolment of members of group personal pensions and group stakeholders. The European Distance Marketing Directive treats membership of these schemes as financial services contracts, and requires members to give consent to join. The Unfair Commercial Practices Directive (UCPD), coming into force by April this year, will compound the problems.
The Opposition have asked, “Why doesn’t the Government just tell Europe to change its rules?” This is easier said than done. Europe moves slowly, and it is unlikely changes could be made by 2012, even if the UK was granted an exemption.
The alternative is to use ‘streamlined joining’ techniques, using signed consent letters from the prospective members, because the UCPD is expected to kill off the seminar attendance joining process. Even here the Government wants the industry to sign up to target-joining rates, based on its own faith in personal accounts take up. This issue is likely to remain unresolved until the later stages of the Bill when it reaches the Lords.
The Bill also requires exempt schemes to pay in contributions at the same rate as personal accounts. This is set at 8 per cent of earnings between £5,035 and £33,540. No problem for most existing schemes you might think, until you read the small print.
That 8 per cent includes overtime, commission, bonuses, statutory sick, maternity, paternity and adoption pay. But most existing schemes base contributions solely on basic pay. If just one employee receives enough bonus, overtime or commission to ensure that 8 per cent of total band earnings is greater than the scheme contribution (based on X per cent of basic pay), the scheme will not be exempt. Failure to comply with the exemption conditions, including paying in the required contributions, can result in the Regulator issuing an Unpaid Contribution Notice. This carries a penalty of up to £50,000 for non-compliance.
There are two solutions to this problem. Change the definition of scheme contributions to match the Personal Accounts definition, or allow schemes to remain exempt based upon another definition of earnings, full basic earnings perhaps?
The other issue that will have a major impact upon Personal Accounts and advice is means testing. More precisely, whether it pays to save. Much has been written about this subject and it affects the pension decisions of millions of existing workers.
The sceptics argue that according to Pensions Policy Institute (PPI) figures, one-quarter of potential personal account savers should not save. The Government argues that telling people who will retire in 2040 or 2050 not to save is irresponsible. How can any reasonable person tell a 20-year-old or a 30-year-old to rely on means-tested benefits that may no longer exist when they collect their gold watches?
Of course, both parties in this debate are correct, but the focus should be on those that retire before 2025, when much more certainty exists that means tested benefits, in a similar form to today’s benefits, will still exist. Some targeting of those most likely to rent their homes, and therefore potentially eligible for housing benefit, would also be useful.
The PPI has identified the problem and has also come up with a rather elegant solution – disregard the first £12 (or £15) of weekly private pension income. This point was raised during the debate that followed the second reading of the Bill, but the Pensions Reform Minister rejected it as too expensive saying that the cost is enormous at more than £600 million”.£600 million might sound like a lot, but in the context of government finances, it is not. To you and me, it would feel like the cost of buying a new kettle or half a tank of petrol.
The cost of the 2p reduction in the basic rate of income tax will cost the Exchequer £6,900 – more than 11 times the cost of telling pension savers that it pays to save. It is high time that the Government bit the bullet on this one before they end up defending the indefensible, as they did with the Financial Assistance Scheme.
Corporate advisers should watch the progress of this Bill with interest – it could fundamentally alter all of your futures.
