Pensions experts have been poring over the Pensions Bill – outlining the launch of workplace-based Personal Accounts – since it was published at the beginning of December.
To many it marks a new dawn for employer-sponsored schemes. But while there is no doubt a new era is on the way, industry experts are quite rightly deferring judgment until the publication of the Personal Account rules and regulations, expected in draft form in the next month or so.
Unlike many, Norwich Union has been broadly supportive of the plans for Personal Accounts (as the National Pension Savings Scheme – NPSS – is to be branded), but that does not mean we remain unconcerned about the direction of some of the legislation.
Despite our concerns, we believe that the Personal Account could help tackle the chronic lack of pension saving in the UK. Too many employers and employees are not paying enough into their pension schemes, or have no pension at all.
As expected, the bill confirms that the Personal Account, one of the remedies of under-provision, will arrive in April 2012. It will mean that virtually all employers, whether large and small, will be obliged to enroll employees aged at least 22 and earning between £5,035 and £33,540 (in 2006/2007 earnings terms) into an “automatic enrolment pension scheme”.
Employers must pay contributions into a Personal Account of at least 3 per cent of the employee’s qualifying earnings. The government will contribute 1 per cent of the employee’s qualifying earnings and the employee 4 per cent, making an 8 per cent total contribution.
There is still some debate on how auto-enrolment will work in practice, but we do know there will be few if any exemptions. All employers will be included, unlike stakeholder schemes where small employers with four staff or fewer were excluded. Employer-based stakeholders will be allowed to continue, inevitably accompanied by a debate about their place in the market.
One of our main concerns is that auto-enrolment will not apply, at least under the present plans, to Group Personal Pensions. GPPs are becoming increasingly popular because of their flexibility and cost-effectiveness for employers, and it will be very damaging if GPPs are omitted from the autoenrolment rules.
Unless GPPs are allowed to have auto-enrolment or equivalent rules they will not be able to compete effectively with Personal Accounts. This will mean that they will not be able to operate on a level playing field and pensions choice will be diminished. NU is in talks with the DWP to ensure GPPs are not disadvantaged.
The main issue is the EU’s Distance Marketing Directive (DMD) which would at present prevent auto-enrolment on GPPs, although it would not have this impact on Personal Accounts because they are exempt.
While these are all important concerns, one threat is very clear. Unless there is a major change to the Pensions Bill before it is given Royal Assent, all employers will have to auto-enroll (or the equivalent) all their qualifying employees into a pension scheme (NPSS or alternative) from 2012, or face the prospect of a £50,000 fine. The threat is there, but what of the opportunities? One benefit, which will become apparent if Personal Accounts take off, will be raising of awareness and understanding of the whole pensions sector.
The other opportunity for the pensions sector, particularly corporate advisers, will be increased inclusion of employees and increased contribution levels overall. Many employers may choose to match employee contributions, bringing total contributions to around the 10 per cent mark.
As many advisers will attest, the lead time on corporate pension advice is long. Because of this, many employers will want to start planning in 2010 to be ready for the changes in 2012. This will drive a huge spike in demand for the corporate advice sector as employers strive to be ready for the changes. Advisers will have to understand the forthcoming regulatory framework and be certain of its impact on clients as early as possible. In past experience we haven’t had any genuine certainty prior to regulation with ‘big’ changes such as this. Given that, it is vital that the DWP fully engages with industry (and viceversa) to achieve clarity as early in the process as possible.
There is much still be decided but early clarity in regulation and a slick advisory process will help to ensure the industry copes with the inevitable changes and, hopefully, the opportunities created by millions of new pension clients.