The Government is adamant that the date will not slip. Tim Jones, chief executive officer of the Personal Accounts Delivery Authority, has the unenviable task of making sure that the personal accounts scheme is ready on time but this is a timescale that the whole pension industry has to work to – not just Pada.
Perhaps the first thing to say is that this will not be a big bang. For a start, pension contributions by both the employer and the worker can be phased in over three years if they wish.
In the first year, the employer pays 1 per cent, the worker 1 per cent as well. In the second year, the rates are 2 per cent and 3 per cent and from then on the rates are 3 per cent and 5 per cent (which includes tax relief).
At this time, it is not clear if all employers and workers will have to phase in contributions for personal accounts. One would imagine that they will always be given the option to pay the full rate from day one. Private pension schemes will probably also consider offering this flexibility.
But the biggest impact for employers will not be a 3 per cent pension contribution. Far more significant is automatic enrolment of all workers into a pension arrangement. It would be naive to think that auto-matic enrolment will be introduced on one day, say, April 1, 2012. The implications for the pension industry and the personal accounts scheme would be too great, as would the costs for UK plc. Instead, automatic enrolment will be introduced in stages over a period of time.
The next question is, how to decide the order of this staging. Pada has recently issued a discussion document asking questions about how to achieve this. It suggests that employers should be targeted accor- ding to their PAYE scheme size – presumably bigger employers first and smaller employers last.
There is no simple solution to this question. Sorting by employer size seems the best approach but it may give some a competitive edge as not all companies within the same industry are the same size.
Also, some people within a region may find they start to pay pension contributions, whereas others, because they work for a very small employer, might not for some time.
These risks and distortions can be minimised if Pada adopts a short but practical implementation period, say, 12 months.
Whatever approach Pada decides on will probably be rolled out for the rest of the pension industry.
Although 2012 seems a while away, advisers may want to initiate conversations with their corporate clients now about the best way of implementing these pensions reforms. If automatic enrolment is going to have a big effect on employers’ cashflow, they may want to consider easing the pain over a few years, gradually enrolling workers into the scheme rather than sticking to the Government’s timetable.
This may be about targeting employees who have previously not voluntarily joined the scheme or it may be about extending the offer to classes of employee or worker not previously included but who will be “caught” under the new legislation.
Although automatic enrolment under group personal pensions has been given the green light from 2012, employers can use streamlined joining and other techniques in the run-up to 2012. These methods can be very effective.
Enrolling tranches of the workforce ahead of 2012 can achieve many things. It eases the cost pain for the employer and it also sends out the signal loud and clear to the workforce that the employer has chosen to take this action to help them save for retirement rather than being pushed into it by the Government.
After all, that goes back to the basics of why employers offer pensions – to retain and reward staff.
Rachel Vahey is head of pensions development at Aegon