Employers could be forced to close their existing pension schemes because they do not comply with the exemption criteria set out in the new Pensions Bill, which paves the way for personal accounts.
Schemes will be classed as exempt if contributions amount to 8% of qualifying earnings, which include overtime payments, bonuses, commission, statutory sick pay and statutory maternity pay. Qualifying earnings will also be based on earnings of between £5,035 and £33,540.
John Lawson, head of pensions policy at Standard Life, said: “I think either schemes will close and move to personal accounts or they might even change the definition [of earnings] for their existing scheme.”
The bill, which was unveiled last month, also removes the requirement for employers to nominate a stakeholder pension provider. Currently, employers with five or more employees must offer a stakeholder plan if they do not already have a pension scheme. With the removal of this legal obligation employers will be forced to auto-enrol staff into personal accounts or an alternative exempt scheme. “Existing stakeholder pensions will continue, but no new stakeholders are going to be written in the market,” added Lawson.
But employers that run defined benefit (DB) plans which are open to future accrual, could benefit from proposals in the bill to reduce the rate of revaluation of deferred benefits from a cap of 5% to 2.5%. This means if inflation exceeds 2.5%, they will no longer have to contribute as much for non-retiree members who have left.
Peter Hain, secretary of state for work and pensions, said that the reduction of the revaluation cap should save employers around £250m a year on average and help them keep DB schemes open.
Jane Beverley, head of research at Punter Southall, said although this move will benefit some employers, the bill does not go far enough in easing the burden of DB schemes. She was disappointed that it did not include conditional indexation so that when a scheme is going through a time of poor funding, a company can say that it is not going to increase its pension payments for that year. Currently, increases in pension payments go up in line with inflation subject to a cap.