At a meeting this week between industry representatives and the DWP, the Government is understood to have finally rejected industry proposals to allow a dual earnings’ model using total band earnings and basic earnings.
Current Government plans will base the exemption test on an individual receiving 8 per cent or more of total band earnings. Qualifying earnings will include overtime, bonuses and statutory maternity and paternity pay. An annual reconciliation would be used to ensure criteria are met.
But the industry has warned that such a move could lead to mass levelling down and damage existing provision.
Standard Life head of pensions policy John Lawson says using total band earnings as the exemption test will lead to extra administration for employers as the majority of existing schemes are based on basic pay.
He says many employers will change the structure of their scheme to mimic personal accounts, with payments based on band earnings, which would lower the contribution levels of many staff.
He says personal accounts will become a direct competitor for existing schemes, something the Government has stressed would not happen, with many employers deciding to close schemes and move employees into personal accounts.
Lawson says: “This Government seems hell bent on damaging existing provision. Throughout the current debate the DWP has stressed that it was looking to address concerns about levelling down and damaging existing provision but this stance does exactly the opposite.
“What they have done is completely against the principles they have been preaching and shows they have no concept of the real world. They have been stringing the industry along all summer and then pulled the rug out at the last minute.”
The Government is thought to believe the industry’s proposal is too complex and is worried certain groups could lose out through the plans. Lawson suggests only those earning between £22,000 and £26,000 where overtime and bonuses make up 20 per cent or more of pay will lose out through the industry’s proposals due to the safeguards proposed.
A DWP spokesman says: “We have not shut the door on further changes, and discussions are continuing with stakeholder groups – but some of the alternatives suggested to us thus far would undermine employees’ minimum level of pension saving.
“It is not the method of calculation that counts – but the overall value of contributions. We propose to amend the Pensions Bill to clarify this, and to allow the value of contributions to be assessed over a period of up to a year to allow for workers with fluctuating wage packets.
“There is no reason for employers to make any changes as long as their existing arrangements result in contributions of at least equal value to those required by the Pensions Bill.
“Moving staff into personal accounts would not remove this obligation or make the calculation any simpler for employers – they would still have to ensure overall contributions were of sufficient value.”