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Mass levelling down unless Govt changes qualifying test

Life offices have united to urge the Government to change the qualifying test for pension personal account exemption to prevent mass levelling down which could decimate existing pension provision.

Standard Life, Aegon, Legal & General and Royal London all want the Government to say that if legislation in the Pensions Bill is passed, it could lead to thousands of companies closing existing schemes and moving employees into inferior personal accounts.

Standard Life head of pensions policy John Lawson says this is a bigger issue than means-testing and estimates that three out of four employer pension schemes will fail the test, including Standard Life’s employer scheme.

Most existing employer schemes are based on basic pay but the Government wants the exemption test for personal accounts to be based on total band earnings.

Experts are warning that this will create extra bureaucracy for providers to ensure their schemes constantly meet exemption criteria.

It is understood that the Government will require employers to prove their scheme meets the criteria every time they pay a contribution.

Furthermore, an entire scheme will fail the test if just one employee does not meet the exemption criteria.

Royal London head of communications Alasdair Buchanan says many employers will just give up and will move to personal accounts which are not as generous.

Alternatively, they may decide to switch their own schemes to be based on band earnings which disregards the first £5,000 of every employee’s salary – thereby reducing the contribution level for many workers.

Lawson is urging the Government to keep a dual earnings model with personal accounts based on band pay and existing schemes based on basic earnings but the Government is understood to consider this would be discriminatory.

Aegon says workers could lose out on at least 40 per cent of their retirement income as a result of such a move.

Legal & General says if employers move to a band earnings system it could be classed as sexual discrimination because women will be the big losers.

Lawson says: “This is a bigger issue than means-testing and will decimate the existing pensions market. It will affect around 4.5 million people.”

Aegon head of pensions development Rachel Vahey says: “This is very harmful to women and lower earners and is completely contrary to what the Government is supposed to be trying to do.”

Legal & General wealth policy director Adrian Boulding says: “This is very bad news for the employees in those schemes. We will lose business and IFAs will lose customers.”

A DWP spokesman says: “The DWP of course understands that many existing schemes use a different definition, and we will be having further meetings with employer representatives to help improve understanding and identify any residual issues. But what counts is the actual amount going into the pension, not the method of calculation.”

On the product front this week, Merchant Investors is considering bringing out a third-way annuity product to compete with existing providers.

The Hartford, MetLife and Lincoln Financial have all launched third-way annuities but some industry commentators have criticised them for being expensive and not transparent on charges.

Merchant Investors head of sales and marketing Richard Ellis says he can see an opportunity to launch a different type of third-way product that would be cheaper and more transparent.

Ellis says: “We are looking at third-way annuities but we want to sit back and see how the market does. This first wave of products has tried to be too close to the traditional annuity product rather than nearer to an income drawdown product. It might be better to approach it from the income drawdown side instead.”

Onto the wonderful world of with-profits and Prudential announced that its total with-profits sales in 2007 rose by 21 per cent to £2.3bn while with-profits bond business leapt by 59 per cent.

Prudential says its life fund has delivered an investment return of 91 per cent over five years and 134 per cent over 10 years.

The fund returned 7.2 per cent last year and Pru says all its endowments will meet repayment targets.

Prudential has added £2.7bn to its with-profits policy values and will increase the majority of annual bonus rates in 2008.


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