The Cutting Edge with Andrew Tully – Standard Life Pensions Ezine

Standard Life's Pensions newsletter for advisers

June 2008

Recent weeks have seen several policy announcements by Government. Some will have immediate impact on advisers while others are longer term issues.

Protected rights from October
Let’s start with the good news. The Government has confirmed people will definitely be able to self-invest their protected rights (PR) from October this year. This was the intended date, but the lack of final regulations has seen some commentators begin to doubt the change. We now know final regulations will appear later this month. Self-invested personal pensions (SIPP), which have taken the necessary steps, will be able to accept transfers of PR from 1 October.

For advisers, the focus will now move to identifying which clients will benefit from this change. Older, higher earning people who have been contracted-out for a significant period may have up to £70,000 in PR pots. Individuals who have transferred benefits from a contracted-out final salary scheme to a personal or stakeholder pension in the past may have considerably more, hundreds of thousands in some cases. People in each of these categories may be attracted by the flexibility and control which a SIPP can offer and some, especially those in older contracts, may be able to reduce charges by consolidating PR money with other pension funds.

Automatic enrolment
Another welcome announcement confirms contract-based pensions such as group personal pensions (GPP), group SIPPs (GSIPP) and group stakeholder (GShp) will be able to operate automatic enrolment (opt-out joining of pension schemes).

One of the significant changes being introduced from 2012 is employers must automatically enrol most of their staff into either a good quality pension scheme or a personal account. The Government believes using automatic enrolment will mean more people becoming members of a pension scheme, compared to using an opt-in method.

Originally the Government’s view was employers wouldn’t be able to operate automatic enrolment in contract-based schemes due to EU directives. The purpose of these directives - the Distance Marketing Directive and Unfair Commercial Practices Directive - is to protect consumers from being misled into signing up for financial services contracts without being given the opportunity to fully consider the contract terms first.

After discussions with EU, the Government has announced automatic enrolment in contract-based schemes is consistent with EU law. The new interpretation recognises the difference between an employer-sponsored scheme to which the employer contributes ('workplace personal pensions') and individual personal pensions which have no employer involvement.

Following this, changes will be included in the Pensions Bill currently progressing through the House of Lords, allowing employers offering contract-based schemes to use automatic enrolment from 2012 onwards.

The good news.....
This is excellent news for the three million people in contract-based schemes. Preventing employers from using automatic enrolment would have led many employers to close their scheme in the run up to 2012, leaving millions worse off in retirement. This would have been completely against the government's stated aim of complementing good existing schemes and targeting personal accounts at people who don’t currently save for their retirement.

...and the bad news
The bad news is the Government is not willing to make this change until 2012. With the green light from the EU - and bearing in mind automatic enrolment can already be used by employers operating occupational schemes - the government should work with the pensions industry and employers to bring the benefits of automatic enrolment into workplace pensions before 2012.

Nearly five million people in the UK have not joined the contract based scheme on offer from their employer. Allowing employers to use automatic enrolment now could play a key role in getting more of these people to save today, rather than having to wait until 2012.

Sensible solutions
Overall this is a sensible conclusion to a protracted negotiation. But there are five million reasons to bring these new provisions into force at the earliest possible date. In the meantime - while we await a common sense approach from Government – Standard Life has several workaround solutions which allow employers to operate a form of automatic enrolment within the current legislation. Speak to your account manager if you would like more details.