Question: How will personal accounts affect existing pension provision? How can advisers prepare for 2012?
Edmund Downes, Aviva: The truthful answer is that we don't really know what the impact of Personal Accounts on existing pension provision is going to be. There are a number of variables which prevent certainty. Most of these we can't control and are not yet known. Examples of these on a macro level are:
- What will be the attitude of consumers and employers towards pension savings?
- Will the media be supportive or antagonistic towards Personal Accounts?
- What will the economy look like in 2012? And,
- Will the scheme be identified with popular or unpopular Government policies?
On a micro level we don't know yet what the charges will be, what the range of funds are and how good the service offering will be. Critically we still can't be sure what the rules on existing schemes actually will be, although the proposed rules on auto-enrolment have recently been published. To top all of this off we can't be sure at this stage whether the underlying administration systems for Personal Accounts will work well, adequately or not at all.
What we hope though is that the impact on existing good quality schemes will be minimal, and hopefully beneficial. Certainly that was the starting point of this round of legislation under the Pensions Commission and we will do our best to preserve and protect existing good quality schemes. The definition of a good quality scheme is clear enough for new schemes, a minimum of 8% of banded earnings with the employer paying no less than 3%. However, we hope that the definition will be broader in reference to existing schemes to take into account non-pensions contribution based benefits such as guarantees, loyalty units and death and incapacity benefits which can't be replicated under Personal Accounts.
Paul Goodwins, Aviva: The essence of the answer to this difficult question is that Personal Accounts move employer pension provision from a value add in terms of recruit, retain and reward, to a hygiene, where all employers will be offering at least a basic level of provision. For the adviser, working on more of a transactional basis with the employer and employees may not add sufficient value over and above what the employer can get from taking the Personal Accounts route. The challenge for advisers is to offer services that really help the employer demonstrate the value of the employee benefits package that has been put in place, often by using a tailored communications package.
In terms of preparing employers for 2012, advisers need to ensure they remain close to what is being introduced, and communicate this effectively to their employer clients. Detail will start to come through during 2009 and into 2010, and this needs to be digested and converted into 'what does this mean to me and what do I need to do?' for employers.
Jamie Clark, Scottish Life: My previous answer covers the potential effect on existing provision from a levelling down perspective. Of course the opposite may also be true. If employers don't already have a scheme, or have a scheme in place which is below the minimum requirements, then they may 'level up' - and there are good reasons to do so which are covered in my previous answer. For employers with no provision in place, they'll have to decide whether to offer their own scheme or rely on Personal Accounts. So we could see an increase in private workplace pension provision if employers don't want to go down the Personal Accounts route. The key factor is exactly how employers will respond and that it very much an unknown just now, especially considering the current financial climate.
Advisers should be speaking to employers now to let them know about the changes and the options available. It may also be useful to segment their corporate client bank into three categories as the messages will be different:
- Those with no pension provision or provision below the 8% band earnings minimum
- Those with pension provision of 8% of band earnings up to 11% of band earnings
- And those with pension provision of more than 11% of band earnings
PADA: Personal accounts is being established as part of the Government's pension reforms to complement existing provision. Like many of the pensions schemes already available to employers, personal accounts will a qualifying scheme, as defined by the new legislation, that employers can use to meet their new duties to automatically enrol eligible employees into a pension into which the employer makes a minimum contribution (3%). Unlike existing provision, personal accounts has a public service obligation to be available to any employer that wishes to use it to meet these duties so has a legal duty to accept any employer of any type, size or sector. Also unlike existing pensions personal accounts is being designed specifically for employees with a low to moderate level of earnings who do not already have an occupational pension that meets the quality criteria of the Pensions Act 2008.
Personal accounts, therefore, may be the simple, single solution for some employers, such as those who don't currently have provision that meets the new legal minimum requirements. However, it may be used by others for certain groups of their workers as a foundation scheme sitting alongside an existing pension. For example some employers might want to use personal accounts for sections of their workforce not covered by existing provision, such as employees on short-term contracts or in in jobs where there is high staff turnover. However, we don't expect huge numbers of companies with existing provision to use us across their workforce - we are designed to complement existing provision. A major part of our customer base will come from employers without existing provision.
For those employers who choose the personal accounts scheme we will seek to minimise the costs of administration by using well established systems and automated processes wherever possible.
The new legislation that comes into effect in 2012 will introduce a major change to workplace pensions in the UK. Recent research has shown that a high percentage of all pensions purchasing decisions by employers are taken with advice so financial advisers have an important role to play. They will need to know what is coming and to start thinking about the options that are available so that clients receive appropriate advice. Advisers can therefore prepare by making sure they are familiar with the detail of the reforms introduced by the Pensions Act 2008 and the new obligations it introduces in 2012 on any employer of anyone working under contract in the UK who meets certain eligibility requirements (for example aged 22 to State Pension Age and earning over £5,035 at 2005 levels).
One key aspect of the reforms that has generated confusion is the distinction between automatic enrolment and personal accounts. Under the Pensions Act 2008 employers will be required to enrol eligible employees into a good quality workplace pension. Personal accounts will be one of the schemes on offer to employers. It will be up to employers to select suitable schemes for their workers. This may mean using existing schemes, setting up a new one or using personal accounts. Employers can choose the scheme they believe is most appropriate for their employees.
However, the new duties mean that there are minimum requirements for workplace pension provision. Auto-enrolment is designed to make it easy and attractive for individuals to participate in pensions saving; however individuals will be able to opt out. The personal accounts scheme will be an independent pension scheme run by a not-for-profit Trustee Corporation in the interests of its members.
To help advisers and their clients, PADA will provide information about the personal accounts scheme. This information will, for example, support advisors and employers in making their decision about whether to choose the scheme to meet the new duties and will support members in any decision they want to make about fund choice or increasing their contributions.
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