The Pensions Bill was debated on a second reading in the House of Commons on 16 January. MPs were asked to vote on the principles of the Bill in advance of detailed provisions to be scrutinised a committee stage. Most of the Bill is concerned with reforms to the State Pension System, but it also contains other provisions that would allow occupational pension schemes to convert Guaranteed Minimum Pensions into scheme benefits and will remove the option to contract out of the State Pension into a Defined Contribution Scheme.
The most interesting feature of the Bill is, however, in the development of the vision of Lord Turner's Pension Commission to reform and rejuvenate pension provision in this country. The Bill establishes a Personal Accounts Delivery Authority in an advisory capacity as a first stage in the introduction of Personal Accounts. There will be a further Pensions Bill next year to actually introduce Personal Accounts.
The concept of Personal Accounts has evolved from the report of the Pensions Commission chaired by Lord Turner. Despite initial Treasury opposition, the concept of compulsory Personal Account pensions saving is coming a step closer. Legislation to actually introduce Personal Accounts will be introduced during 2008 and only then will the Authority be given executive powers and responsibility for implementing Personal Accounts.
Even during this initial advisory stage, however, the Authority will have considerable influence over the shape of Personal Accounts. The National Association of Pension Funds (NAPF) has been lobbying hard over the structure of Personal Accounts. It believes that there is a strong case for giving the Authority clear objectives from the start and that it should seek to minimise the adverse impact that Personal Accounts will have on workplace pension schemes which have higher contribution rates but provide better benefits.
Having received an unopposed Second Reading, the Bill is now going through the Commons Committee stage, with discussions focusing so far on Carer's Credit and proposals to reduce Basic State Pension qualification to 30 years contributions.
The Government is presently still consulting on the structure of Personal Accounts and this consultation will continue until 20 March 2007. The main proposals for Personal Accounts are:-
- All eligible employees will be automatically enrolled into either a Personal Account or an employer-sponsored scheme.
- Employees will contribute a minimum of 4%, matched by a minimum 3% employer contribution and around 1% in the form of normal tax relief.
- The Personal Accounts will be low cost based on the approach outlined by the Pensions Commission.
- Simple choice for members of investment funds, to include ethical and branded funds and a default fund for those who do not want to make a choice.
- Delivery authority to be staffed by individuals with expertise in business and financial services.
- Governance scheme with operational independence.
- No transfers in and out of Personal Accounts to prevent reduction in outside pension provision.
- Maximum annual contributions of £5,000.
The Government have endorsed the NAPF's view that Personal Accounts must not displace existing good quality pension schemes. James Purnell, the Pensions Minister, has promised that those running Personal Accounts would have a specific legal objective of ensuring that the impact on the existing market is minimised. Personal Accounts should be for those not currently making adequate provision and without access to a good occupational pension scheme.
Of particular interest in the consultation is whether the contribution ceiling should be set above the proposed £5,000 level. The Pensions Commission recommended that the ceiling should be at £3,000 as a higher ceiling risks concentrating saving in Personal Accounts by ensuring that most employers can cater for the vast majority of employees within the new system.
Consultation is open until 20 March 2007 and all views should be addressed to the DWP with details available on their website.
Andrew Holehouse is a partner specialising in pensions with commercial law firm Shepherd and Wedderburn
0131 473 5192