Advisers often ask if there is now certainty that the 2012 pension reforms are in place. The answer is yes, er, sort of.
The most recent consultation papers completed the legislative picture. These included an update on the automatic enrolment regulations consulted on earlier this year.
The Department for Work and Pensions has extended the period during which employers give employees information about the pension scheme and enrol them, from 14 to 30 days. The employee then has another 30 days to opt out. This makes things a bit simpler but means employers and schemes will not know what the employee has chosen to do until day 60 (from date of employment, reaching age 22, etc), by which time, up to three monthly contributions might have been collected.
The new drafts include a provision to extend the final payment date rule from the 19th of the month following contribution deduction, to the 19th of the second month following contribution deduction. The purpose is to allow employers to hold on to the pension contributions, pending the employee’s opt-out decision. This would allow the employer to simply refund the money rather than go through the rigmarole of investing and then disinvesting it from the pension.
On the plus side, the information that employers must give enrolling employees in respect of personal pensions and occupational pensions has been harmonised. This is a big step in removing needless differences between these two.
The DWP also set out the enrolment timetable. Large employers are first to join in October 2012, small employers by April 2015 and new firms created during this period will join between April and October 2015. Contributions will remain at 1 per cent employer, 1 per cent employee until October 2015, 2 and 3 per cent respectively from then, finally rising to 3 and 5 per cent from October 2016.
Build-up of meaningful savings pots will be dreadfully slow. An average earner (£25,000) will only reach the trivial limit (£18,000) in 2023, over 10 years after they first joined, assuming their fund grows at a real return of 2 per cent a year after charges. Crisis, pension and solve are not
There is also some new guidance on default funds. The definition is reasonably open to allow for innovation but the charges for the default fund (but not other funds) must not exceed the stakeholder cap.
This seems at odds with what the FSA said in its latest RDR paper which implied that charges could not exceed the price of personal accounts without good reason. They should talk to each other.
Finally, the Conservatives have clarified they remain full square behind automatic enrolment but the personal accounts scheme is up for review if they are voted in. The fate of this scheme should not delay advisers’ work with employers. Automatic enrolment is happening in 2012, whoever is in power, so work with employers, if it has not already started, should begin now.
John Lawson is head of pensions policy at Standard Life