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A minister and a meltdown

Controversy continues over personal accounts this week, as the Government made the startling admission that it is planning to get around EU laws by auto-enrolling employees into group personal pension schemes, even though this is prohibited under EU law.

This has got some commentators quite worried including Scottish Life’s Steve Bee who says this could lead to a meltdown of existing GPPs in 2012 when personal accounts are introduced.

In an evidence session on personal accounts held by the work and pensions select committee recently, pensions minister Mike O’Brien said he will not ask the EU for permission to allow auto-enrolment for good GPP schemes in case it refuses.

O’Brien said: “What we are not trying to do is get the EU to intervene here. We are not going to them and say, we are going to do this and now are you going to intervene, because the chances are that they might say yes and we do not want them to say yes.”

Under current proposals, employers who run GPPs deemed to be as good as personal accounts will be exempt from personal accounts and all their staff will be auto-enrolled into the employer’s GPP.

But EU law prohibits auto-enrolment into contract-based schemes, such as GPPs.

Bee says: “The Government is saying, we are hoping for the best but we do not want to mention it to the EU in case we are not allowed to do it. It is a cock-eyed way of doing things and does not fill me with confidence.”

Hargreaves Lansdown head of pension research Tom McPhail says: “The potential for a fairly catastrophic failure appears to be quite high because if they don’t find this accommodation, they are going to have to explain to millions of pension investors why they have to cancel their existing arrangements and sign up to a new one. That is not going to go down well at all.”

Syndaxi Financial Planning managing director Robert Reid says: “It is a very amateurish way to do anything and it beggars belief.”

O’Brien did do something right this month though, by announcing that legislation will be drawn up to allow Pension Protection Fund compensation to be shared as part of a divorce settlement.

Currently, when a defined benefit pension scheme becomes part of the PPF, pension-sharing in a divorce is not an option due to an omission in the Pensions Act 2004.

Following pressure from Baroness Hollis and the Equal Opportunities Commission, O’Brien says this anomaly will be removed.

In a separate move, the pensions minister also said he would look into removing a tax anomaly which reduces the attractiveness to employers of providing pension advice to their employees.

Following a meeting with Aifa director general Chris Cummings in which the anomaly was flagged up, O’Brien said he would look into the matter.

Currently, when an employer pays an external company fees to provide face-to-face advice to its employees, the cost of the advice is taxed as an employee benefit.

But legislation which was enacted in 2004 exempted advice from tax as long as it is offered to all employees, only covers pensions and costs no more than £150 per employee a year.

If the cost of the advice exceeds £150 per person, the whole amount is taxable and not just the excess.

Shaking up the annuity market this week is Legal & General which announced it will be using customer postcodes as an additional risk factor when quoting for annuity business.

Following a pilot study in conjunction with Hargreaves Lansdown, L&G says customers living in certain areas may receive an increased annuity rate over and above Legal & General’s standard rate.

L&G says this is the next step towards increased pricing sophistication in the conventional annuity market.

But many have their doubts.

When the pilot was first announced, Norwest Consultants principal Harry Katz said it is a publicity stunt and will provide a very small annual difference to pensioners.

Annuity Direct managing director Stuart Bayliss said: “You cannot get away from the fact that those in better areas will get less. It is a patronising gesture to the man from Glasgow and just as patronising to the man from Guildford. They are bottling out from a real challenge.”

And finally, former vice chairman and chief operating officer of Morgan Stanley in Europe, Amelia Fawcett, has launched securitisation group PensionsFirst, which aims to manage the risks faced by defined benefits schemes.

PensionsFirst says it has developed a proprietary rating methodology for longevity securities, supported by a risk management platform that is able to analyse all scheme specific risks, including longevity.

Chairman Amelia Fawcett says PensionsFirst’s entry into the market will revolutionise the way risk is managed in the global DB industry.

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