January 2008

Landmark or dead weight?

Dear Editor,

The Pensions Bill is a landmark in the Government's programme of pension reform. Millions of UK adults will be automatically enrolled into low-cost pension arrangements for the first time. If successful, personal accounts could dramatically improve pension provision, especially among lower earners.

There remain concerns, though, about the impact on the existing pensions market. If employers close down existing pension arrangements and move to personal accounts with a lower contribution rate - most likely the 3% minimum - then much of the benefit will be lost. It could also, of course, have a devastating effect on the existing pensions market.

There are many steps the Government can take to reduce the likelihood of this happening, and some are already planned. These include a maximum contribution of £3,600 a year (indexed from 2005) and ring-fencing of personal accounts at least until 2017. These steps are welcome, but more is needed.

The Government is still considering the possibility of allowing additional special contributions into personal accounts, in tax year 2012/13, and possibly also subsequently. This would largely negate the yearly contribution limit, and would lose some of the focus on the target group of lower earners.

We also need easily implemented exemption criteria for employers with existing good pension arrangements. Otherwise employers may take the path of least resistance and opt for personal accounts with a lower contribution rate.

Some issues apply to all types of pension arrangement - for example, allowable waiting periods and whether earnings means basic salary or full PAYE income - but there is a specific issue for group personal pensions (GPP).

Full automatic enrolment is not currently possible under the Distance Marketing Directive, and the Government has been seeking a workable alternative in consultation with other stakeholders.

Finally, there must be a level playing field between personal accounts and other provision. This includes having an equivalent regulatory regime, and crucially also having financial parity. It is disappointing that the Bill leaves open the possibility of Government subsidy, which could be highly anti-competitive. The possible extent of such funding must be rigorously monitored in the coming months and years.

The Pensions Bill is a milestone, but we are only part-way through the journey. The Government, the Personal Accounts Delivery Authority, the pensions industry and other stakeholders must continue to work together for an outcome that gives solid pension provision to those who have none, while preserving an existing framework that is the envy of many other countries.

Letters can be sent to The Editor, Retirement Planner, Incisive Media Investment Division, 1st floor, 2 Stephen Street, London W1T 1EA or by email to helen.morrissey@incisivemedia.com.

Ian Naismith
Head of Pensions Market Development
Scottish Widows