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Pension puzzle

The scale of the challenge represented by personal accounts, for the Government and employers alike, is becoming increasingly apparent.

The most concerning side-effect is this well intended initiative is threatening to derail the pension savings of many who currently benefit from generous employer contributions. This is not just due to the direct extra cost on employers of auto-enrolment but also the potential complexity of self-certifying that their workplace pension schemes meet the quality criteria.

The DWP recently proposed new measures designed to ease the admin and financial burdens. They say employers will be able to certify schemes for up to a year if they are confident their jobholders will receive the minimum contributions required by law. But the self-certification process for DC schemes is still being set in a way that employers will find challenging, complex and time-consuming. It may mean many give up and default into personal accounts.

Most DC schemes use some form of basic pay, possibly with allowance for regular additional earnings as the definition of salary for pension purposes but personal accounts require contributions to be based on band earnings. Employers are going to have to compare apples with pears to certify schemes meet the exemption criteria of at least matching the personal accounts’ minimum.

The new DWP draft regulations attempt to be employer-friendly by building in some leeway but are not as good as they seem at first glance. By the end of the phasing-in period, contributions need to at least match 8 per cent of band earnings. Employers will be required to certify that the total amount paid into the scheme is equal to or more than 7.6 per cent of qualifying earnings in the certification period, so the leeway is only 0.4 per cent, hardly enough to make life any easier. They then get three months to make up any shortfall. This certification has to apply to at least 90 per cent of staff that are active members of the scheme.

To avoid this complication, employers could decide to change their scheme to base contributions on band earnings but this in itself could have unfortunate consequences and not just for high- earners. Lower-paid employees, the very group that the pension reforms are trying to help, could be hit hard. Someone on a basic of £20,000, who does not earn any overtime or bonuses, could see their pension contribution reduce by more than a quarter.

There is a danger that all of the above may lead to the levelling down of contributions into existing pension schemes and defaulting into personal accounts. This risks some of the workforce missing out on bigger pension contributions. How much easier it would be for employers if the benchmark were not based on band earnings – come on DWP, it’s not too late.

Martin Palmer is head of corporate pensions marketing at Friends Provident


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