Future cruel

The Pensions Bill\'s publication leaves many questions unanswered. James Phillipps finds that what has been clarified is not all good for advisers


Just like London’s flagship Olympic stadium, Personal Accounts are meant to be ready for business by 2012, but the jury is out on which is most likely to be late or over-budget.

The Government’s Pensions Bill last month introduced the primary legislation required to make pensions reform and personal accounts a reality.

But, after the Bill receives royal assent in the summer, the Personal Accounts Delivery Authority will have just three-and-a-half years to design and implement the regime and its IT infrastructure, a timescale which many commentators fear is too ambitious.

There also remain a significant number of uncertainties around what shape Personal Accounts will eventually take, but the Bill does better enable corporate advisers to start preparing their clients for the future changes.

The Bill did not set the contribution levels for Personal Accounts in stone, surprisingly, but it did provide an outline of what existing schemes will need to offer to be able to qualify to opt out.

For defined benefit arrangements, the qualifying scheme test is fairly straightforward. Contracted-out schemes automatically qualify. Where DB schemes are contracted-in, the employer will have to obtain a certificate from an actuary proving it meets certain criteria.

Tony Bacon, senior consultant at Lane, Clark & Peacock, says the bar has been set low, however, as the basic qualification is that the scheme must have an accrual rate averaging a minimum of 1/120 of members’ salary over the past three years.

“The certificate is a one-off expense but the benchmark for DB schemes is probably 1/80 salary and few schemes have an accrual rate as low as 1/120,” he says.

Existing group personal pensions, or stakeholder (see box), arrangements face more onerous challenges. They will be required to auto-enrol staff into the scheme, including agency workers, which has surprised many. Auto-enrolment into GPPs is not currently permissible under European legislation, but minister for pensions reform Mike O’Brien has vowed this will be solved by early 2008. The pensions industry is hoping this pledge is made good.

What has raised far more concern, however, is the fact that qualifying schemes need contributions equivalent to 8 per cent of “qualifying earnings”. These include overtime, bonuses, commission, sick pay and maternity and paternity pay.

“That is the deal breaker,” says Mike Fosberry, head of financial services of Smith & Williamson. “Most schemes are set up to pay a percentage of full basic salary, and my concern is that with companies not knowing what bonuses will accrue, they could fall foul of the qualifying rules.”

Furthermore, qualifying earnings only relate to earnings between £5,035 and £33,540, so companies will need to work out which is greater out of qualifying earnings within this band and 8 per cent of basic pay.

Jane Beverley, head of research at Punter Southall, doubts whether many companies have sufficiently robust payroll systems to cope with this and notes that bonuses can vary wildly year to year, adding further complexity.

“We also need guidance on whether this applies at an individual member or group level,” she adds.

Beverley says advising clients on the subject when the Bill still has to pass Committee stage, expected in January, is difficult, but she expects momentum to gather when the Pensions Act is passed in the summer.

Bacon agrees, but says there is a growing recognition of the increased costs Personal Accounts and the auto-enrolling of clients into existing schemes will bring. He believes ways of mitigating this are moving up the corporate agenda.

The major concern, and one that has long been mooted, is the likelihood of employers looking to level down existing provision or simply close schemes and move to Personal Accounts.

This will be particularly prevalent among large firms, such as retailers and leisure companies, that have low scheme take-up rates and high staff turnover, he says, as it will remove a large administrative burden for them.

Beverley adds: “A straw poll of our clients found nearly all said that they wouldn’t level down. But, a lot of companies have not really thought it through and I would expect that number to decrease when the time comes.”

Equally, there are concerns about how many companies looking to introduce pension provision will now wait five years.

“We know we will lose clients to Personal Accounts,” Fosberry says. “But we face a barren landscape in the run up to their introduction.”

One certainty for employers is that even if they choose not to act for five years, burying their head in the sand after that is not an option. The Government is planning tough enforcement rules around Personal Accounts and is desperate not to repeat its high-profile failure to police the implementation of stakeholder. An estimated 80,000 companies flout the rules by not offering stakeholder schemes.

Employers that wilfully fail to offer staff access to personal accounts or a qualifying scheme will first be sent a compliance notice. If this is ignored, they can then be fined up to £50,000 with the initial penalty being increased by £10,000 a day thereafter. Individual directors can also be jailed for up to 2 years.

The outlook is not all bleak, however, but advisers will undoubtedly have to prove their worth to certain clients.

Besides helping companies plan for the increases in costs, Andy Tully marketing technical manager at Standard Life says the onus really is on corporate advisers to show clients why they are better off retaining GPPs than moving to Personal Accounts.

“The adviser has to ask the employer, do they want to be seen to be offering the bare minimum or do they want to offer their own personalised GPP with a better investment range,” he says. “It does not have to cost significantly more and will give employers much more bang for their buck.”

Rachel Vahey, head of pensions development at Aegon Scottish Equitable, is hopeful that key measures around controversial aspects of the Pensions Bill can still be amended. She counsels advisers to keep in regular contact with clients and provide them with regular updates on developments.

Whether Personal Accounts are delivered on time and on budget remains to be seen, but many in the industry seem to be putting their money on the Olympic stadium being open to the public first.

Ian Farr, chairman, Association of Consulting Actuaries

“Worried that indexation will remain compulsory at all”Relaxation of indexation for DB – help or hinderance?

The Government is to face intense lobbying over its proposed pensions reforms, particularly around their anticipated impact on defined benefit schemes.

The Pensions Bill was designed to include provisions to boost workplace pensions, alongside introducing the primary legislation for Personal Accounts.

However, some experts argue that one key measure, the proposed reduction of the indexation cap from 5 per cent to 2.5 per cent, will only accelerate the closure of final salary schemes, while reducing the value of member’s benefits.

The Government says this will provide DB schemes with a £250m annual cost saving, but Tony Bacon, senior consultant at Lane, Clark & Peacock notes this will enable companies to wind up their schemes sooner by reducing future liabilities.

He says: “My view is that this will unequivocally not encourage employers with final salary schemes to keep them open and could encourage some to wind them up sooner. The cost-saving is marginal and will only come in gradually, while adding a further layer of administration.”

Several product providers, including Standard Life, will lobby against this but will face stiff opposition, not least from the Association of Consulting Actuaries.

Ian Farr, chairman of ACA says he is “worried” that indexation will remain compulsory at all.

The ACA is to step up its calls for legislative changes to allow new career average DB schemes that would introduce an element of risk-sharing with indexation conditional on funding reserves.

Expert view – The death of stakeholder
Rachel Vahey, head of pensions development, Aegon Scottish Amicable

“This is the death of stakeholder. Although stakeholder could be a qualifying scheme, employers not wanting Personal Accounts are more likely to prefer a group personal pension, which is more bespoke, less restricted and often cheaper”

The Government’s pension reforms have been dubbed the “death of stakeholder” by many in the industry.

The Pensions Bill removes the requirement of companies to offer employees access to a group stakeholder scheme when its personal accounts regime comes into force in 2012.

This requirement will be replaced with an obligation to auto-enrol employees into personal accounts or a scheme deemed at least as good as personal accounts, which passes the ‘qualifying scheme’ test. Unlike with stakeholder, companies will also have to contribute to personal accounts.

Existing group stakeholder arrangements can be kept in-force, provided they are qualifying schemes.

Rachel Vahey, head of pensions development at Aegon Scottish Equitable, expects this will largely depend not only on employer contribution levels, but also on the quality of its default fund option. However, she expects little, if any, new group stakeholder schemes to be written, with Personal Accounts effectively replacing stakeholder as the occupational scheme of choice for employers not wanting to set up a group personal pension scheme.

She says: “This is the death of stakeholder. Although stakeholder could be a qualifying scheme, employers not wanting personal accounts are more likely to prefer a group personal pension, which is more bespoke, less restricted and often cheaper.”

Individual stakeholder may survive in a limited capacity depending on how the primary advice channel proposed in the Financial Services Authority’s retail distribution model pans out, Vahey adds.