Pension plans: How will the new personal account pension scheme work?

Proposals for a National Pensions Saving Scheme, or Personal Accounts scheme, as it has become known, have received broad backing from employer groups as well as members of the general public – more than 80% are in favour, according to a recent report from the Department of Work and Pensions. 

If, as planned, they are introduced as part of wide-ranging pension reforms in 2012, employers will be required to auto-enrol all employees into either an existing pension scheme or a Personal Accounts scheme. The minimum employer contribution allowed under the accounts scheme will be 3% of an employee’s wage.

Employers that enrol employees into their existing scheme will have to do so by applying for an exemption from Personal Accounts.

The National Association of Pension Funds (NAPF), the leading representative body for employers offering pensions, is among those groups to welcome the initiative. It says the package of proposals should increase the number of people saving for retirement in the UK.

However, the association’s senior policy adviser, Michelle Lewis, was keen to emphasis that Personal Accounts should complement, and not compete with, existing good workplace pension provision.

“One of the concerns we have is that employers may ‘level down’ schemes to the basic minimum required by Personal Accounts,” she said.

“Personal Accounts need to be targeted at the right people – those without access to workplace pension schemes – and we have called on the government to provide financial assistance to help them [employers] meet the costs of auto-enrolment,” she added.

This, said Lewis, would best take the form of a fiscal incentive to promote “levelling up” and to encourage employers to auto-enrol employees into a pension at today’s typically high level. Called the Good Pension Fiscal Incentive, she envisions it would apply for a short transitional period, probably the three-year period for the phasing in of mandatory contributions.

But with organisations competing to attract staff, Charles Cotton, an adviser on reward and employment at the Chartered Institute of Personnel and Development, did not believe Personal Accounts will herald a general drop in employers’ pension contributions.

He pointed to the fall-out from the introduction of the minimum wage where many employers paid above the minimum level to promote themselves as good employers.

“They saw it as a chance to enhance their organisational brand,” Cotton said, “and did not want to come across as bargain-basement employers. The same might happen with Personal Accounts.”

He said employers should start thinking now about what kind of pension arrangements they are going to provide from 2012.

To help them understand the situation – especially those running small businesses where other pressures usually take priority over pension provision – Cotton said education from government was vital.

“If the pension reforms are going to work, government must get its act together and start communicating with employers and employees alike,” he said.

“It doesn’t matter how good the reforms are, if they are not taken up or understood then it hasn’t worked,” he added.

James Lloyd, a senior researcher at the International Longevity Centre agreed. He said one of the reasons people don’t save or have adequate pension cover is that the area of pensions is so complicated.

Lloyd would especially like to see more clarification on how Personal Accounts will fit into a move towards means-tested pensions. He said there may be some cases where Personal Accounts might not actually be the best option.

He said: “These incidences might include those on low incomes with a broken employment history, who might therefore lose means-tested benefits, or single people likely to rent in retirement, with no additional savings, who may be at risk of losing entitlement to housing welfare.”

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