Employers have won their battle to keep their current methods of calculating employees’ qualifying pay for pension contributions to existing schemes when the government’s planned system of personal accounts comes into effect in 2012.
After being lobbied by a number of industry bodies, such as the National Association for Pension Finds (NAPF) and the Confederation of British Industry (CBI), the government has made a u-turn on its original plans to count all an employee’s earnings, including overtime, commission and bonus payments, when calculating the 7% of total earnings that must be contributed in order for a scheme to be exempt from placing staff into personal accounts.
However, Mike O’Brien, minister for pensions reform, has now stated that employers will be able to use their existing arrangements, which only take an employee’s base pay into account when calculating pensionable pay, where this will produce at least as good, or better, outcome than employees would gain under personal account’s minimum standard when assessed over the period of up to a year.
Industry bodies, such as the NAPF, called for a change to the government’s initial proposal because it believed that most employers contributed more than 3% of salary into their pension scheme from employees’ basic pay and to take into account their fluctuating pay would involve additional calculations at a cost to employers.
As a result, there was a concern that employers might close good existing schemes and move staff over to personal accounts with the minimum pension contribution.
O’Brien said:†”We’ve listened to concerns and made considerable progress. We continue to work with a wide range of stakeholders on the detail.
“Employers will be able to use their existing contribution calculations where these provide equivalent or better contributions than the minimum set out in reforms, when assessed over a period of up to a year.
“The government will bring forward amendments for the Lord’s Report stage, should these be necessary, to make this position clear and to facilitate an annual test.”
Joanne Segars, chief executive of the NAPF, said: “We welcome the fact that the minister is reviewing this issue and listening to key stakeholders because it is important to protect existing workplace provision. However, the devil of how this will work will be in the detail. It is important that existing schemes can administer the new rules easily and with no additional costs.”
Damian Stancombe, head of employee benefits at Punter Southall, added: “Mike O’Brien has realised that there are good pension schemes out there and he is supporting that. I really see this as a positive move. Some employees will see it as a negative if they earn high commission but this is a narrow band of people.”