What are the pension reforms?
The Government is making widespread pension reforms from 2012. From that
date, employers will have to automatically put most of their employees into
a pension scheme and pay a minimum level of contribution on their behalf.
As part of this, the Government is introducing a new type of pension scheme called personal accounts. Despite the name, personal accounts will operate as an occupational (trust-based) pension scheme.
When will personal accounts be introduced?
The Government aims to introduce this new pension scheme from April 2012. Both
employer and employee contributions will be phased in over a period of three
years.
Who are personal accounts aimed at?
All employees not in a 'good' pension scheme will be automatically enrolled
in personal accounts if they are age between 22 and State Pension Age and earn
more than £5,035 pa (as at 2006/07). Employees aged between 16 and 22 can choose
to join and, if they do, the employer needs to pay at least the minimum contribution
on their behalf.
Can individuals opt out of personal accounts?
Yes, people can opt out of personal accounts. However they will be re-enrolled
in the scheme every 3 years.
How are self employed people affected?
The Government has indicated that self-employed can opt into personal accounts
if they wish. But, by definition, they will receive no employer contribution.
How much will people need to pay to personal accounts?
Employers will be required to pay at least 3% of earnings for their employees
who decide to remain in the personal accounts scheme. Employees will pay 5%,
and receive tax relief in the usual way. All contributions are based on band
earnings - these are earnings between £5,035 and £33,500, for 2006/07, with
these amounts being indexed each year in line with earnings growth.
Contributions will be phased in over three years from 2012. For employees this means an initial 1% payment level increasing to 3% then 5% (including tax relief). Employer contributions will be 1%, 2% and then 3% from 2014 onwards.
How much will people need to pay to an alternative good quality scheme
which an employer offers?
To be a good alternative scheme, the contribution levels must be the same as
personal accounts. So there needs to be a total contribution of 8% with the
employer paying at least 3%. Contributions can be phased in the same way as
under personal accounts.
Are there any contribution limits under personal accounts?
Yes, there will be a maximum amount which can be paid into personal accounts
each year by, or on behalf of, a member. This is likely to be £5,000.
The Government may allow people to pay in a higher contribution in 2012 when personal accounts are introduced. This may be as high as £10,000.
Much higher contributions are generally allowed to other pension schemes.
What impact will the introduction of personal accounts have on employers?
From 2012 employers will have to automatically put employees into either a personal
account or another good pension scheme. Doing nothing is not an option.
To be a 'good' scheme there needs to be a minimum contribution of 8% with the employer paying at least 3%. Charges will not be taken into account.
At the moment, UK legislation doesn’t allow employers to automatically enrol employees into a contract-based scheme such as a Group Personal Pension, Group Stakeholder or Group Self Invested Personal Pension Scheme. However the UK Government has agreed with the EU that employers operating workplace pension schemes (an employer sponsored pension scheme to which the employer contributes) will be allowed to use automatic enrolment. It isn't yet clear when this will be allowed – it may be introduced from 2012.
How will the introduction of automatic enrolment affect employers?
Pension schemes which currently operate automatic enrolment achieve substantially
higher take-up rates than schemes operating on an 'opt-in' basis. So schemes
which remain in existence beyond 2012 will have an increased membership.
This will mean a greater cost to employers. For example, if only 60% of staff currently join the scheme, automatic enrolment may increase this to 80% or 90% of staff.
Some schemes already have take-up rates of over 80% and are unlikely to see this rate increase significantly when automatic enrolment becomes compulsory.
What options do employers have?
They could choose to close their scheme completely, close it to new entrants,
or close their scheme to some staff (eg only keep it open for senior staff).
Some employers may also choose to reduce how much they pay to their scheme (this is often called levelling down). For example if an employer currently pays 5% for the 60% of staff who are members, reducing the contribution level to 3% for the 80% or 90% who join via automatic enrolment, will keep the employer's costs broadly the same.
I've heard of a problem called qualifying earnings – what’s that about?
To be a 'good'scheme and satisfy the exemption test, schemes must attract at
least 8% of the employees’ band earnings. Band earnings are defined as earnings
between £5,035 and £33,540 but under the provisions of the Pensions Bill additional
benefits would also be included in the calculation such as overtime, bonuses
and commission. This is completely at odds with the way in which most existing
company pension schemes operate. In general, existing company pension schemes
base contributions on full earnings (rather than earnings over £5,035) and basic
pay (some use bonuses and overtime but these are not the norm).
That means that for each employee, the scheme must work out in each pay period whether 8% of basic pay is greater than or equal to 8% of total pay between £5,035 and £33,540. This may well change month to month depending on the amount of overtime worked or commission paid.
This provision will be difficult for good existing schemes to comply with. And if the employer becomes bogged down in bureaucracy then there is a high likelihood that existing schemes will be closed in favour of personal accounts. Standard Life would like this condition to be changed to allow existing definitions such as 8% of total basic pay to be compliant. Or at the very least allow this check to be performed on an annual basis.
How can Standard Life help?
Standard Life can help employers cope with this potential increase in costs
without closing their scheme. For example employers could reduce the amount
they expect to allocate to salary increases in the next few years – rather than
having a salary pot of 4% for each of the next few years, they have a pot of
3.5%. The saving generated will cover the cost of the increased pension contributions.
Alternatively we can help employers gradually increase the scheme membership
in the run up to 2012 by using automatic enrolment only with new employees.
We also have several workaround solutions which allow employers to operate a
form of automatic enrolment within current legislation.
What opportunities does the introduction of personal accounts bring?
Relationship benefits for financial advisers.
Increase take up within existing schemes.
There are also opportunities to sell new group schemes to employers who don't
currently have pension provision. Benefits of a GPP or GSipp compared to personal
accounts. For example, quality of service, access to advice, wider investment
options, access to drawdown and ASP.
If I want to sell a group scheme to an employer, do I need to demonstrate
it is better than personal accounts (RU64)?
It isn't clear as yet whether the RU64 rules will apply to sales of private
pension schemes rather than personal accounts. But, even if this were to be
the case, personal accounts will be a very basic scheme, with extremely limited
choices of investment and retirement options. So it may not be suitable for
many employers.
What effect will the introduction of personal accounts have on new business
in the run up to 2012?
New schemes written between now and 2012, that subsequently close when personal
accounts are introduced will be unprofitable. We expect most providers to avoid
writing this sort of new business over the next few years.
Standard Life will continue to focus our efforts on attracting top quality group schemes. Those schemes that have high contribution rates and are sponsored by employers who want to encourage as many of their employees to join as possible.
Some employers may also set up or retain schemes for senior staff after 2012, whilst automatically enrolling junior staff into personal accounts. Standard Life will continue to support this type of arrangement.
What work is Standard Life doing to influence the Government on personal
accounts?
We have, and will continue to engage with government at all levels on personal
accounts. Some issues that we are especially seeking to influence at present
are:
What is the personal accounts delivery authority (PADA)?
PADA is a non-government body which has been set up to implement the personal
accounts regime. For example PADA will be involved in the scheme design, charge
levels and shapes, and the tender process for contracts to operate personal
accounts. It is expected that PADA will be wound up once the personal accounts
scheme has been established. The ongoing running of personal accounts will be
the responsibility of the Trustee Corporation.
What powers will PADA have?
The Pensions Bill, which is currently going through Parliament, gives PADA wide
ranging powers. This includes involvement in which existing schemes are allowed
to be exempt. By conferring such powers on PADA, it has the ability to shape
the regulatory environment in which other competing pension schemes can compete
with personal accounts.
This introduces a clear conflict of interest. As PADA’s main role is to deliver successful personal accounts, which compete with existing pensions, its ability to influence the rules under which existing schemes operate is clearly anti-competitive. Standard Life believes PADA’s powers should be restricted to advising government on establishing the personal accounts scheme.
Are there trustees of personal accounts?
Yes a Trustee Corporation will be set up by 2012. This body will be responsible
for the ongoing running of personal accounts. It’s not yet known who will be
a member of the Trustee Corporation.
Who will administer the personal accounts scheme?
Personal accounts will be a nationalised pension scheme, and PADA will award
contracts to one, or more, private sector companies to administer the scheme.
In a similar way contracts will be awarded to investment houses to manage funds.
Neither the administrators or investment houses will be branded – they will
operate in the background. These contracts are likely to go through a tender
process, beginning in 2008.
Does Standard Life intend to participate as a provider in the personal accounts
market?
Our involvement in personal accounts is unlikely.
What type of pension scheme are personal accounts?
The scheme will be set up as a trust-based occupational pension scheme, with
employers'and members' panels to represent their interests. It will be run by
the personal accounts Trustee Corporation containing people appointed by the
Government.
What retirement and death benefits will be payable from personal accounts?
The benefits payable from personal accounts will be the same as those for registered
pension schemes. This will mean, for example, that -
Will there be any interaction between personal accounts and other schemes?
Transfers between personal accounts and other schemes will be prohibited - with
a review to take place in 2017.
What options will be available under personal accounts?
Personal accounts will be a very simple scheme, which means there will be very
limited choices. This will include a default investment fund - which is likely
to be a tracker fund with a lifestyle option - plus a small number of additional
investment options. At retirement an annuity on the open market may be the only
choice.
Will personal accounts replace Stakeholder pension schemes?
Stakeholder pensions will continue to be one of the options available for pension
saving. But the requirement for an employer to designate a stakeholder pension
will be removed when personal accounts are introduced.
Tax and legislation are likely to change. The information provided here is based on Standard Life's understanding of law and HM Revenue & Customs practice at date of publication and the legislation we believe will apply from 6 April 2012.
Every person's circumstances will be different and require advice. Standard Life accepts no responsibility for advice that may be formulated on the basis of this information.
No guarantees are given regarding the effectiveness of any arrangement entered into on the basis of these comments.
Standard Life Assurance Limited, registered in Scotland (SC286833), Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH, authorised and regulated by the Financial Services Authority. 0131 225 2552. Calls may be recorded/monitored. www.standardlife.co.uk
©2008 Standard Life
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Standard Life Assurance Limited (SC286833) is registered in Scotland at Standard
Life House, 30 Lothian Road, Edinburgh EH1 2DH and is authorised and regulated
by the Financial Services Authority. 0131 225 2552. Calls may be recorded/monitored.
© 2008 Standard Life.
