“Flipping a coin to decide between auto-enrolling all eligible jobholders into a private pension scheme or the personal accounts scheme is not the way to go. Both have their advantages depending on the profile of the workforce, so you should consider the various criteria carefully. It may even be that you end up with the equivalent of the coin landing on its edge – with a different solution for various segments of the workforce.
The first point to note is that the personal accounts scheme is designed to complement private pensions, not replace them. It’s aimed at low- and medium-earners whose employers don’t offer a private pension scheme, and it’s based on a ‘one size fits all’ principle with no room for tailoring.
Secondly, auto-enrolment doesn’t mean auto-engagement. Employers and employees will need a certain level of advice to encourage them to join and/or pay more. They’re going to need more information and education on pensions than ever before. So it’s important to consider what support, communications and services will be available.
Keeping the options open
Early indications are that the personal accounts scheme will have limited, generic, e-based communication support and a limited fund range. Contrast this with private pensions, which generally offer a range of communication solutions both online and in print, and may also offer tailored and/or dual-branded communications to schemes that meet certain criteria.
A wide range of tools and services, including pension and portfolio planning tools, target benefit calculators, affordability calculators, financial planning websites, online services such as policy valuations and fund switches, are also available. And tailored fund choices, from a wide range of funds, for different client risk profiles are generally on offer. But most importantly, private pension providers also offer helplines for employers, trustees and members.
When it comes to the retirement offering, private pension providers take a holistic approach to pension planning. Advisers and providers identify members nearing retirement in advance, and they may then be offered a tailored solution for their personal circumstances, be it a single- or joint- life annuity, income drawdown or phased retirement solution. They can buy this on the open market or from their current provider.
Our understanding is that, under the personal accounts scheme, a lifetime annuity on the open market will be the only option available to members. In addition, members won’t be able to phase their benefits as with the phased retirement options available in the private sector.
Some technicalities
There are various key differences in the technical detail. The first is the maximum yearly contribution limit, which in 2012 will be around £5,000 for personal accounts but – private pensions allow contributions (that qualify for tax relief) up to 100% of a member’s salary.
Then take transfers for example. Private pensions generally allow all transfers, in and out, subject to normal advice processes- whereas the personal accounts scheme will generally ban transfers in and out. The main exception to the ban on transfers in will be for early leavers with short service benefit from an occupational scheme. The main exception for transfers out will be for those over age 55, to allow for pension consolidation.
Death-in-service benefits for inheritance tax purposes is another one, with private pensions offering more flexibility.
A further key difference, which will have a big impact on employers, is the waiting period allowed for auto-enrolling eligible jobholders. Under private pension schemes, employers have the option to delay auto-enrolment for up to 90 days, but if they choose to delay, the total minimum contributions increase to 11% of qualifying earnings with at least 6% being paid by the employer. This postponement will mean a much reduced administration burden for employers with a high employee turnover. Under the personal accounts scheme, there won’t be a waiting period and all eligible jobholders will need to be auto-enrolled on the day they become eligible.
Heads or tails? As you can see, it’s not as simple as that. It’s important to understand the differences between the two types of schemes and the implications of each for employers and for the various segments of the workforce, before you make a decision.”
