The devil is in the detail with personal accounts

Apparently off-the-cuff government decisions about personal accounts are only adding to the confusion, says David Woods.

The pensions industry has won its fight for employers to use existing contribution calculations, even if they are based on employees’ base pay, to determine if their current pension scheme will be exempt from the planned system of personal accounts, due to come into effect in 2012.

This is a U-turn from the government’s initial plan to count all of an employee’s earnings, including overtime, bonuses and commission, when calculating the 7 percent of earnings (comprising 3 percent from the employer and 4 percent from the employee) on which contributions are based. But as long as existing calculations produce a result as good as, or better, than the minimum standard, when assessed over a period of up to a year, employers can continue to use these.

However, despite the success of lobbying bodies, including the National Association of Pension Funds (NAPF), the industry is still crying out for clearer details of the new pensions system so employers can begin to prepare for it, particularly if the government is going to make decisions apparently off the cuff, as in the case of last month’s announcement by Mike O’Brien, minister for pensions reform, about the calculation of pensionable pay.

Damian Stancombe, head of employee benefits at Punter Southall, said that as long as the government was releasing information, that was a good thing. “We have really made progress with the definition of qualifying earnings. What O’Brien has done here is deal with one of employers’ worries. Hopefully there will be more to come.”

But Stancombe admitted there was still a lot of uncertainty about personal accounts, making planning ahead difficult. Misinformation could lead to confusion about the benefits of occupational pensions, he said. “We don’t need any more confusion about pensions.”

So far, employers have had only the Pensions Bill for information, which is due to gain Royal Assent this autumn. It effectively says staff will be automatically enrolled into a personal account or equivalent employer-sponsored scheme and sets out details of the minimum contribution levels. Michelle Lewis, senior policy adviser at the NAPF, said: “Everyone in pensions wants to know as much as they can, as employers need to think about setting benefits plans. The government needs to make an announcement in normal language.”

These comments also follow last month’s publication of the Personal Accounts Delivery Authority’s (PADA) Charging Structure Consultation Response Document, which revealed the industry was split over the charging structure that should be applied to personal accounts. PADA plans to use these findings in a report to the Department for Work and Pensions on the management of personal accounts this autumn, and the DWP is expected to publish more details about personal accounts next year.