The exemption test for good quality contract-based schemes remains one of the key unknowns in the personal accounts debate, yet this is probably the most important issue for advisers speaking to employers about the future of their group pension scheme.
The December 2006 White Paper did discuss exemption criteria but offered much greater certainty to occupational schemes than for group personal pensions and employer-sponsored stakeholder.
The reason for this lies in the enrolment process. Occupational pension schemes can automatically enrol employees into the scheme. That is, the employer can make the employee a scheme member without the member’s express consent.
Contract-based schemes such as GPPs and GShps are different. They are contracts and there must be some contractual agreement before the employee enters into the contract. This agreement can form part of the contract of employment.
Another important factor is the EU distance marketing directive which aims to prevent the cold-selling of financial services products at a distance.
The main condition of the DMD is that the potential client (in this case, the GPP or GShp member) must get information about the contract in a “durable medium”. This could be on a CD, for example, but is most commonly a big bundle of paper explaining the key features and contract terms.
It is arguable whether joining a GPP or GShp is truly distance or cold-selling. A reasonable view would be that joining such a scheme does not come within the spirit of the DMD.
The employer has already decided to offer employees a scheme so, unless the employer has failed to tell employees they are about to offer a pension scheme, the invitation to join does not exactly come out of the blue.
Reinterpreting the DMD in relation to contract-based group pension schemes would appear to be one solution. However, on close examination, the DMD specifically mentions contracts and personal pensions. UK lawyers might have a difficult job in constructing an argument that this should not apply to a group of personal pensions.
Another route is to use streamlined joining where an employee gives written consent to joining the scheme. The problem with this solution is that the Department for Work and Pensions views this as opt-in rather than opt-out. Persuading them otherwise will be an uphill task.
Is this problem truly insurmountable? Have all the options been exhausted?
No, I think there is a workable solution that remains unexplored. Pass legislation that inserts an overriding clause in the contract of employment of all employees who work for employers with good contract-based schemes. The employee would simply join the scheme as a condition of their employment. They could even be given a couple of weeks to read the small print before the contact completes. And another 30 days to cancel the contract if they choose to opt out.
This makes the scheme look and feel like true opt-out, which should keep the DWP happy. The client will get the obligatory bundle of paper, which keeps the DMD happy. And a condition in the contract of employment means that contract law is satisfied.
What we need now is some certainty on this issue and soon. We need to be able to tell employers now what they need to do to exempt them-selves from personal accounts. As an industry, it is vitally important that we keep these good schemes. They are our future lifeblood.
John Lawson is head of pensions policy at Standard Life.