There is a new potential employer’s pension scheme appearing on the horizon – personal accounts.
The Government is conscious that personal accounts have the potential to upset the apple cart. One of the most repeated phrases in the White Paper was: “Personal accounts will complement rather than compete with the existing pension market.”
One of the main pillars of personal accounts is that employees will be auto-enrolled into them. It makes sense, therefore, that they should also be auto-enrolled into any other type of pension scheme the employer puts forward. The rub comes as contract-based arrangements – group personal pensions and group stakeholder – cannot use auto-enrolment in its strictest sense because of a European directive that states if you are going to enter a contract, you have to know about it beforehand.
The benefits of auto-enrolment are well documented, including good take-up rates and easier administration. Understandably, contract-based schemes have strived to emulate the effect of auto-enrolment while keeping on the right side of European legislation. Most providers have been successful in finding a way to get the same effect and outcome.
Aegon uses something called streamlined joining. This means the employer has to ask the employee for a signature up front, mainly to give consent to the contract but also to allow contributions to be deducted from earnings and data to be passed to the provider.
Once that is given, that’s it. The employee becomes a member of the scheme and does not have to fill in any forms or make any decisions. Ideally, we would like to miss out the request for signature stage altogether but the only way to do that would be to include the wording in a contract of employment. That is a solution if the employer is setting up the company and taking on the employees from scratch (unlikely) or is prepared to change contracts of employment for all affected employees (also unlikely).
The White Paper outlines that to pass the exemption test for personal accounts, employer pensions have to be occupational schemes and have auto-enrolment, the logic being that contract-based schemes cannot use auto-enrolment and therefore cannot be exempt.
This is unacceptable. We need to find a way round this and the Government is prepared to listen and to work with industry to do that.
When setting the exemption test, we need to focus on measures that achieve the outcome of enrolling the employee into a pension plan with the minimum amount of work from them. Even if an employee has to sign a document once, this will still achieve the desired outcome of them being part of the scheme without necessarily having to make decisions about contribution level or investment choice.
Life would be easier without the signature, though. Employment law will always protect you, even if you have not signed a contract of employment. It would be an ideal solution if we could change employment law to give employees’ prior consent to join a pension contract. No signature would be needed and the effect of auto-enrolment would be achieved.
I am pleased the Government is prepared to work hard on this issue but we cannot afford to be too prescriptive within this area. We need to focus on outcome rather than method. Going by the book on auto-enrolment could potentially mean employers being unable to treat contract-based arrangements as exempt. That would have a devastating impact on provision for hundreds of thousands of people.
Rachel Vahey is head of pensions development as Aegon Scottish Equitable.