Not an option: How changes to the Pensions Bill will affect private schemes

The pensions bill is nearing the end of its passage through the House of
Lords. As David Robbins, public policy adviser at
Watson
Wyatt observes, despite many minor amendments at committee stage,
the two most important features of the bill are likely to sail through
relatively unscathed. These are (a) the introduction of auto-enrolment of
members into pension plans and (b) the framework for the ‘personal account’ (the
government’s latest wheeze to ensure the lower-paid get some pension from the
private sector).

Both auto-enrolment and personal accounts will come into play from 2012; both
constitute fundamental changes in the pensions landscape, for two reasons.
First, until now, employees have had to decide to opt in to company schemes.
Auto-enrolment (with an option to opt out) has a proven record of greatly
increasing the number of people in pension schemes. So this about-face fits well
with the government’s long-term aim of shifting the pensions burden as much as
possible from the state to the individual.

Second, the ground-breaking novelty that the introduction of personal
accounts bring with them is a compulsion on employers to contribute. This has
always been optional for employers. Even with the introduction of stakeholder
pensions in April 2001, the company was not required to contribute ­ all it had
to do was to set up the mechanism for employees to opt in to a scheme.

Personal accounts, on the other hand, rewrite the rules. Employers will have
to contribute 3% on top of the employee’s 4%, with around 1% coming from the
government in tax relief.

The Delivery Authority (DA) was created by the 2007 Pensions Act to deliver
the personal accounts system as a functioning entity by 2012. Having consulted
on the charging structure for personal accounts, the next step for the DA is to
issue a consultation on the ‘default fund’ that will constitute the heart of the
personal accounts system. The default fund will be there for employees who have
no taste for actively managing their own portfolio.

Sweeping as the changes in the pensions bill are, they are not expected to
derail proceedings. As Robbins puts it, “No one has said that personal accounts
are rubbish.

The basic shape of the thing looks right and, although there are all kinds of
details around the edges to be sorted out, personal accounts will get a
reasonable reception.”

The big fear, however, is that instead of being a benefit for the lower-paid,
the exercise will lead to a raft of employers lowering their contributions to
employee schemes to the 3% level espoused by the personal accounts system.

If that happens, it will devastate private pensions and the law of unintended
consequences will once again have been visited on the UK pensions sector.