The decision not to allow transfers in and out of personal accounts could lead to employees being trapped in "high charging, poor value personal pensions", warns the Trades Union Congress.
In its response to the pensions white paper: ‘Personal Accounts: a new way to save’ the TUC welcomes the idea of the new system, but points out there are a number of risks in the run up to the implantation of the system in 2012 which will “require vigilance by the government”.
The 32-page document says while the decision not to allow transfers is “understandable in relation to the desire to protect existing schemes”, it warns it could expose employees to “the risk of the financial services industry attempting to sell personal type pensions in the run up” to personal accounts.
The TUC argues in its document the lack of transfers will “create an incentive for the insurance industry to sell large volumes of group personal pensions (GPPs) from now until the formal introduction of personal accounts; and an incentive for employers to buy into these schemes before personal accounts are introduced in an effort to avoid auto-enrolment".
It says this means employees who do not have access to “decent” occupational pensions could end up with “substantial pension savings trapped in high charging, poor value personal pensions”.
Although it says managing this risk should be the responsibility of the Financial Services Authority (FSA), the TUC says “we would hope the Department for Work & Pensions (DWP) works with the FSA to ensure this risk is contained”.
In addition, the document supports the idea of auto-enrolment combined with the minimum employer contributions, although while it recognises some employers may have difficulties in implementing the new regime, it suggests waiting periods should only be granted to “good quality” schemes.
The TUC also recognises the need for a strong information framework to help employees decide whether to opt-out of the new regime and, as a result it says, a number of organisations will have a major role to play, including central government, regulators, the Personal Accounts Board (PAB), trade unions, employers, and consumer groups.
But while access to objective financial advice is important, the private sector is currently “unable to provide access to that advice to the target market for personal accounts on commercial terms that make sense to industry and the individual” says the TUC.
Meanwhile the body also suggests there should be a strict compliance regime in place to ensure employers comply with their obligations under any new legislation relating to contributions.
It says this should include the ability to levy “appropriate financial penalties linked to the degree of non-compliance by the employer”, and warns the PAB should have powers to recover unpaid contributions through restoration orders; impose a schedule of contributions; publicly ‘name and shame’ employers and have the ability to bring prosecutions.
The TUC says while this “effective, proportionate enforcement and sanctions regime will encourage employers to behave responsibly towards employees”, it warns it is important employees should have access to a decent complaints and redress scheme to ensure they do not lose out personally as a result of the employer’s behaviour.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
£300bn of liabilities
View from the front row
Transfer from occupational scheme
Appointed by FCA and PSR boards