The government has failed to clarify the parts of the pension portability directive which could cost an extra £210m a year in pension contributions.
In its initial consultation on the Directive, which closed on 13 March, the Department for Work and Pensions (DWP) pointed out there were a number of points which were unclear in the wording of the directive, and which could potentially lead to costs of up to £210m.
But in its newly-published response to the consultation, the DWP has failed to make much headway in clarifying the issues through negotiations with the European Commission.
At the moment the draft Directive is being discussed within the European Council’s Working party and the European Parliament Committee for Employment and Social Affairs is also now beginning to look at the Directive which is scheduled to come into force from 1 July 2008.
Depending on how certain outstanding issues negotiated between the UK and the rest of the EU, advisers would have to at least be aware of how the Directive would affect people moving jobs to work in the EU, and what changes, if any, trustees and administrators may have to make to the scheme rules to comply with the new legislation, such as reduced waiting times for new members.
But at the moment, the biggest uncertainty in the current draft is what exactly ‘supplementary pension schemes’ covered by the directive include as, although the Commission says its intention is to include all pensions with a direct link to employment, the DWP pointed out many UK personal pensions also have such a link.
The DWP suggests group personal pensions and employer-nominated stakeholder pensions both have a link with the employment relationship, leaving a potential issue as to whether these schemes would be included in the definition.
In the consultation, it argued if employer-nominated stakeholders are covered by the directive, then the cost of the proposals would be negligible as the government could make some minor changes to the rules governing access to stakeholder pensions.
But in its response it says it believes the “current draft of the directive is intended to cover all occupational pension schemes, but not personal pension schemes”. Although it warns it is still “working towards clarifying the intention of the Directive in this respect, and also towards how it is reflected in the text”.
However while the definition of a ‘supplementary pension scheme’ remains unclear, the DWP has managed to get clarification over the minimum age requirement.
One part of the part of the draft directive intends to introduce a minimum age of 21 for the vesting of pension rights, but the way the text is currently drafted it could have also meant workers would have to be 21 before they could join a scheme.
If employer-nominated stakeholder schemes are not covered by the directive, this could have led, in the DWP’s estimates, to costs of £70m in extra employer and employee contributions.
However, the DWP confirms in its response the directive does not set a minimum age for joining a scheme, which means there is no need for a scheme which currently sets a minimum age for joining to change anything.
The government says “it appears schemes are allowed to set a waiting period for new employees to join the scheme up to a maximum of 1 year, although new employees must reach any minimum age for joining set by the scheme before they can join, even if that means they will wait longer than the 1 year period.”
The second area of ambiguity was the detail surrounding waiting periods before workers can join ‘supplementary pension schemes’, which in the original draft suggests all waiting times should be reduced to a year.
In its consultation, the DWP calculated this could cost an extra £140m in employer and employee pension contributions, as those with current waiting periods of more than one year would be subject to additional administration burdens.
However, the government says it is working to ensure the text expresses the interrelationship between the “vesting, waiting period and minimum vesting age requirements in a clearer manner”.
But it also says it would “particularly welcome any further information on the impact of the requirement to restrict waiting periods to one year”, as one response to the consultation estimated reducing waiting periods to one year could cost the pensions industry an extra £55m a year.
In addition, the government says the timeframe for implementing the reforms has still not been agreed, although it suggests the timescale proposed by the UK should depend on the changes required, and should allow sufficient time for any legislative and process changes.
But despite failing to clarify all of the questions it raised in its initial consultation, the government says the exercise has played an important part in helping to clarify issues from the draft of the directive, and says all comments will feed into the “UK’s negotiating strategy of the dossier”.
And it adds while it supports the “overarching principle behind the directive” of labour market flexibility, it maintains it is important to achieve a balance between improving rights for members of pension schemes, and any additional burden on schemes, remaining scheme members, and employers.
The consultation response states the government will “continue to take a proactive approach in negotiations seeking a text that is clear and workable in the UK, and which minimises the cost on UK schemes “.
It adds the government believes it is vital the scope of the directive and the definitions are clear, and “the UK will seek amendments to the text to ensure correct coverage, and that the variety of forms of provision in the UK is recognised”.
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 7968 4558 or email [email protected]IFAonline
Speaking at Professional Adviser's conference
Equity release panel
Speaking at PA360
TISA's Peter Smith
Shone a light on 'closet trackers'