The Department for Work and Pensions recently published its feedback statement following consultation on the Pensions White Paper. The good news is that the focus of personal accounts has been kept on the target market of low to middle-earning employees who do not have access to good workplace pensions. The DWP has reiterated that personal accounts will complement rather than compete with the existing pension market.
Personal accounts will be trust-based occupational schemes with boards of trustees drawn from professional experts advised by member and employer panels.
The personal accounts delivery authority will set up the schemes, with responsibility moving to the personal accounts board in 2012.
The aim is to encourage more people to save more for retirement. The Government intends to achieve this by auto-enrolling all employees between 22 and state pension age earning more than £5,000 a year into qualifying pension schemes or personal accounts from 2012.
Employees can opt out if they wish. Every three years, employees who are not in a qualifying scheme or personal account will be re-enrolled. Employees between 16 and 22 can opt in to personal accounts and the employer must contribute on their behalf.
The annual contribution cap will be £3,600, rising in line with national average earnings before and after 2012. If employees stay in personal accounts, they will contribute 4 per cent of earnings between the current band earnings of £5,000 and £33,500 a year. On top of this, tax relief of 1 per cent will go directly into their personal accounts. Employers will have to pay an additional 3 per cent of band earnings. Contributions will be phased in over three years from 2012.
The Government is considering allowing employees to make higher contributions in the first year and having a new lifetime contribution limit for personal accounts. This will help those with irregular working patterns but may be difficult to work in practice.
As with any trust scheme, trustees will be responsible for the investment strategy. There will be a default fund plus a range of other funds, expected to include social, environmental and ethical funds and possibly some branded funds. Whether this choice will be appreciated is another matter.
The existing tax regime and annuity rules will apply to personal accounts so people with total pension funds lower than 1 per cent of the lifetime allowance (£16,000 in 2007/08) will not have to buy an annuity. They will be able to take their funds as a cash sum, part of which will be taxable.
Employees will need clear information to help them make decisions about personal accounts. It will be the delivery authority’s responsibility to deliver this. The delivery authority will also be responsible for making sure employers know their obligations and employees know their rights.
There is concern that employers may encourage employees to opt out by using sweeteners or even threats and the DWP is considering how to protect these employees.
A package of measures to help existing schemes has been set out in the feedback statement. Transfers into and out of personal accounts will not be allowed before 2017, after when the decision will be reviewed.
Employers with qualifying schemes will not have to offer personal accounts. Qualifying schemes must have auto-enrolment and there will be a simple exempt scheme test. For defined-contribution schemes, this will be a total contribution of at least 8 per cent of band earnings, of which at least 3 per cent must come from the employer. European regulations do not allow auto-enrolment into contract schemes and the Government is continuing to work closely with the industry to devise a practical alternative.
Auto-enrolment will be phased in for qualifying schemes on a contribution basis for defined-contribution schemes or employee groups for defined-benefit schemes from 2012. Schemes that provide contributions or benefits above the personal account minimum can have a three-month waiting period.
The delivery authority will be set up this summer and executive powers given in the next Pensions Bill. Then the real work will begin.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable.