Millions face being worse off in retirement
Hopes of preventing further damage to UK workplace pensions following the introduction of the Government’s latest savings initiative in 2012 have suffered a major setback, an expert said this week.
It means that millions of low and middle-income earners could be worse off in retirement, it was claimed.
In what effectively amounted to a policy u-turn, civil servants have abandoned discussions with a cross-industry group aimed at developing an acceptable quality test for existing pension schemes.
The fear is that the Government’s decision to call off talks could have a detrimental impact on existing savings provision, potentially leaving low to middle income earners worse off in retirement.
John Lawson, head of pensions policy at Standard Life, said: “Millions of low earners are set to lose out as a result of the Government’s failure to listen to concerns on this issue.
“The Government has repeatedly claimed that it wants Personal Accounts to complement rather than compete with existing pension provision, but this appears to be nothing more than empty rhetoric.
“In fact, the opposite would appear to be true. The Government appears to be hell-bent on destroying existing provision rather than protecting it.”
Over the last month an industry group representing providers and employers has been in discussions with the Department of Work & Pensions regarding the need for a quality test for existing workplace pension schemes which would not represent an unacceptable burden for employers.
According to Standard Life, this followed a clear signal from pensions minister Mike O’Brien, that he was willing to discuss a solution which would cause minimal disruption for employers who already provide quality pensions schemes for their employers.
The solution put forward by a group comprising of the ABI, NAPF and CBI would have allowed employers to certify that the majority of their employees would be as well off, if not better off, than under existing arrangements than they would be in the Personal Accounts scheme.
This test would have allowed schemes to continue using their existing definitions of pensionable earnings and would have been performed every three years, thereby representing a negligible burden for employers.
Initial discussions between the industry group and DWP officials are said to have progressed well, with much of the debate revolving around the detail of the idea rather than the principle. However, at a meeting earlier this week, DWP’s officials stunned the industry group by announcing they would not be progressing with the idea. Instead the Government will progress with a quality test developed by its own officials which will effectively require pension schemes to adopt the same definition of pensionable earnings as the Personal Accounts scheme.
This is despite industry warnings that requiring schemes to comply with such a test could be damaging to existing provision and potentially leave many employees worse off in retirement.
While most existing schemes base their contributions on a percentage of basic earnings, contributions to the Personal Accounts scheme will be based on eight per cent of all earnings between £5,035 and £33,500.
This will leave employers with the administrative headache of trying to measure contributions to existing schemes against what would be required under the Personal Accounts scheme and, in the event of a shortfall, reconcile any differences through top-up payments.
It is feared that some employers may try to avoid this burden, along with additional costs incurred, by closing existing schemes and enrolling employees into Personal Accounts or altering the terms of their schemes by adopting the same definition of pensionable earnings as Personal Accounts.
So, how does this decision potentially affect employees from 2012?
According to Standard Life, such a move would impact heavily on employees, particularly low earners, as it would lead to the first £5,035 of earnings being disregarded for the purposes of calculating pension contributions. In turn, this reduction in contributions would lead to a significant lowering of pension benefits. Women will be particularly affected as they make up the majority of part-time workers.
John Lawson said: “The decision by civil servants to reject the idea put forward by this cross-industry group is a real backward step. The government was initially reluctant to consider it in the first place but we thought it had finally seen sense when Mike O’Brien said he was interested in finding a solution.
“To perform another policy reversal on top of that in the space of a month is incredible. We urge the Government to re-think.”