For the last twelve months, the future for group personal pensions and group stakeholder plans hasn't looked too healthy.
The Government’s previous opinion was employers couldn’t automatically enrol employees into these pensions vehicles (unless it was part of their terms and conditions of employment) because of European legislation - the Distance Marketing Directive and the Unfair Commercial Practices Directive.
This would have meant from 2012 employers who already offered this type of pension would be forced to close them, probably pushing their employees into personal accounts, lower contribution rates and so smaller retirement incomes.
However, the Government swooped in with a superhero reprieve for GPPs last month by announcing that, after discussion with the European Commission, automatic enrolment into GPPs from 2012 would be consistent with European law. And so we can all heave a collective sigh of relief.
This is fantastic news. The only way the Government’s pensions reform strategy will succeed is if more people save more money. That is not the same as eight million people joining personal accounts – especially if they are forced to swap their higher contributions under GPP for lower ones in the personal accounts scheme.
However, we all know that the effect of pensions reform will be felt long before 2012. To help ease into their new responsibilities, and so smooth their cash flow as well as communications, many employers will want to introduce automatic enrolment into their GPP schemes ahead of 2012. They can’t do that now. The terms of the announcement are quite clear – automatic enrolment only from 2012.
But this doesn’t really make sense. I think automatic enrolment should be allowed once the legislation has settled on exactly what a ‘qualifying scheme’ will look like. Once we know for certain the details for minimum contributions and what type of default funds will be allowed.
We all know the statistics about how much delaying taking pension decisions could cost people. The given understanding is delaying paying into a pension for about ten years could effectively halve someone’s final retirement income.
So, if an employer is willing to make the automatic enrolment commitment, and the member is protected through a 30-day cancellation period, it makes perfect sense to get the ball rolling now. And give people a fighting chance of getting to retirement with a decent income to live off.
Rachel Vahey is head of pensions development at Aegon
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