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Best laid plans

The automatic enrolment of employees in 2012 marches on. A consultation on the process has just completed and further draft regulations are expected in autumn, two of which are of particular note.

The first of these is qualifying earnings. This is to allow employers operating schemes with basic earnings’ definitions to continue working on that basis. The regulations will offer some leeway when reconciling amounts paid in at the year end. So, if Y per cent of basic earnings is less than 8 per cent of band earnings (including bonus, overtime, commission, etc), the difference will not need to be made good if it falls within a certain tolerance.

Unknown at this stage is what that tolerance will be. To be of any worth, it must be better than that which is already implicit in the rules. Anyone with a pension contribution of 8 per cent or more of basic earnings will always have a contribution greater than 8 per cent of band earnings as long as their non-basic pay is less than 15 per cent of their total pay. Therefore, the rules should allow, at a minimum, those with 20 per cent of non-basic pay items to pass the test with an 8 per cent of basic pay contribution.

The whole point of allowing a tolerance at all is so as not to force existing schemes to review their contribution rates. In the current economy a review would be a dangerous thing, with employers unlikely to become more generous. Worst of all, employers could move to band earnings, hitting the pension contributions of low-earners in the process.

A second consultation on charges may also be launched. Following pressure from consumer groups wedded to the idea that low charges equals better pensions, the Government has launched an investigation into group pension scheme charges.

I would be astounded if they found charges were excessive. Pricing in the group pension market is cut-throat, with most schemes falling in the range of 0.25 to 0.8 per cent.

Those same consumer groups point to target charges of no more than 0.5 per cent for personal accounts when citing what is achievable in a state-sponsored scheme. But it remains to be seen whether personal accounts can actually deliver at this level without taxpayer subsidy. The Personal Accounts Delivery Authority has been racking up costs of £2m a month for more than a year now, and that is without even starting to build an administration system.

Most employers with existing schemes do not want to put their employees into a state-sponsored one. Nevertheless, it is important that these consultations are not used to stack the deck against private-sector schemes or we end up with a national- ised pension system with administration outsourced to Denmark or the US.

That would be galling considering the UK already has the most efficient pension administration in the world.

John Lawson is head of pensions policy at Standard Life

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