Pensions reform will change our world for ever. From 2012, all employers will have to auto-enrol the vast majority of their employees into a pension scheme and pay a pension contribution in respect of them.
This is going to cost employers time and money. Many will try to pass these costs onto employees with lower pay rises and possibly job losses. But for the first time a lot of UK employees will be saving for their retirement.
Sounds fantastic doesn’t it? But sometimes we’re in danger of forgetting that 2.6m people are already doing a very good job at saving for their retirement within contract-based schemes.
And we can’t afford for the new in-coming rules to disturb this saving pattern. Those employers who operate GPPs should be allowed to keep them for current and new employees. Otherwise, the consequences will be great for those employees.
We can’t make the assumption that if someone is saving in a personal account they will be as well off as if they had saved within a GPP. Because they won’t.
The two pension schemes are different. AEGON has produced figures showing pension income paid out after 25 years of saving at the 8% default level into a personal account is roughly the same as the income paid after 20 years saving 9% a year into a typical GPP.
This assumes 0.5% amc for personal accounts and 1% amc for GPPs. This is because contributions to personal accounts will be based on band earnings, while GPP contributions are based on full salary, and employer contributions are usually higher than the default 3% personal account level.
That’s why it’s vital to get the qualifying pension scheme test right. It has to be simple, so employers can tell at a glance whether their pension scheme meets it.
But it also has to be inclusive. A European legislative anomaly at the moment prevents strict auto-enrolment into contract-based schemes like GPPs.
So we need to make sure we design the rules to allow work-around solutions, such as stream-lined joining, that achieve the same outcome as auto-enrolment.
This will allow employers to continue with their current pension provision, without the need to swap pension arrangements. The difference to the employee could be an extra five years’ saving.
This could give them a better income in retirement, and hopefully a better quality of life in their final years.
Rachel Vahey is head of pensions development at AEGON Scottish Equitable
The views expressed in this article of those of its author and do not necessarily represent those of IFAonline or any other Incisive Media affiliated organisation.IFAonline
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