Pension Reforms: Personal Accounts
In December 2006, the Government published a White Paper, outlining its workplace pension reforms, including proposals for personal accounts. The proposals are to introduce a straightforward opportunity for workers to contribute to a high-quality, low-cost savings vehicle. This should increase retirement savings throughout the UK and reduce the reliance on the State.
The scheme is expected to be introduced in 2012 and is likely to have the following key features.
Governance
Personal accounts will be a trust-based defined contribution (i.e. money purchase) occupational pension scheme. It will be regulated in much the same way as existing trust-based defined contribution schemes.
Low Charges
Through personal accounts the Government aims to provide people with a simple low-cost way of pension saving. The charge structure and level of charges that will apply to members in the personal accounts scheme are yet to be decided. The Personal Accounts Delivery Authority published a summary of responses to their consultation on charges structure for personal accounts on 15 July 2008, and will make recommendations on the structure and level of charges as part of its wider advice to Government on the delivery of personal accounts. The Government fully intend that the scheme will be the type of low cost scheme envisaged by the Pensions Commission.
Investment Choice
There is likely to be a choice of investment funds, which may include options such as social, environmental and ethical investments, as well as branded funds.
For those not wishing to make an investment choice, there will be a default fund. Members will be automatically enrolled into the default fund if they do not choose an investment.
Membership
If an employer chooses to use the personal accounts scheme to fulfil their duty, it is proposed that:
- Workers between 22 years of age and State Pension Age will be automatically enrolled if they earn more than around £5,035 per annum;
- Employers will be required to pay contributions equal to the value of 3% of the worker’s earnings that fall within a band of earnings of between around £5,035 and £33,500 per annum (in 2006/07 earnings’ terms);
- Workers will be required to contribute a futher 4% on the same band of earnings, while the Government will contribute around 1 per cent in the form of normal tax relief;
- The band of earnings will be reviewed annually to see if it has maintained its value in relation to changes in average earnings, and will be up-rated accordingly;
- Workers under 22 years of age and above State Pension age will be able to opt into the scheme, with access to employer contributions if they earn more than £5,035 per annum; and
- Workers with earnings below £5,035 a year will be able to opt into a workplace pension scheme. The employer will not be required to make a contribution, but may do so if they wish.
Workers that are auto-enrolled into their employers’ qualifying pension schemes will be exempt from being auto-enrolled into another qualifying scheme (including personal accounts).
Anyone who joins personal accounts will be able to continue to save in their personal account even after they leave the workplace or move to an employer that does not offer personal accounts.
The self-employed will not be subject to auto-enrolment but will be able to opt into the personal accounts scheme.
Employers
- Employers who provide money purchase pension schemes will be required to pay compulsory employer contributions into the scheme.
- Employer contributions will be phased in, so that the burden on employers is minimised; and
- The employer contribution rate will be set out in primary legislation to ensure they are certain about their responsibilities.
Opting Out
Employers will need to automatically enrol their workers into a qualifying pension scheme (of which personal accounts will be one). Workers will be able to opt-out of their employer’s scheme if they choose not to participate.
Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.
Transfers
There will be a general prohibition on transfers to and from the personal accounts scheme. This will be reviewed in 2017.
Contribution Limits
There will be an annual contribution limit of £3,600 (in 2005 earnings’ terms). This will be uprated by earnings year on year.
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