The Pensions Bill and the outcome of Government discussions will have a big effect on the pensions industry, in respect of pension saving and annuity purchase. In this regard the Association of British Insurers (ABI) yesterday issued a last-ditch plea to the House of Lords at the second reading of the 2007 Pensions Bill. The new style Personal accounts could prove uneconomical and threaten existing workplace pension schemes unless key changes are made to the Bill, according to the ABI. It is calling for pension ministers to include a ban on transfers in and out of personal accounts, a £3,600 annual contribution cap and efficient management of public spending to be written into the Bill.
‘Despite the efforts initially taken by the Government to develop consensus across political parties and stakeholders for reform, there is no evidence in either the 2007 Pensions Act or the current Bill of any of the measures promised by the Government to safeguard existing pensions provision and encourage its growth beyond 2012,’ the ABI said in a statement. Employers must contribute 3% under personal accounts, which is half the average employer contribution level of 6%. There is no contribution cap. There is therefore the view that employers could start reducing their pension contributions as they switch staff from current schemes to the new personal accounts.
The ABI wants the Government to reveal the true cost of personal accounts, adding that set-up estimates of up to £4.5 billion was already ‘distorting’ the existing pensions market by relying on tax payer subsidy. The ABI was also unhappy that the Bill proposed to use a salary offset method to benchmark existing pension contributions against a personal accounts standard which would significantly reduce contributions for the lowest earners. Employers faced with the quality test are expected to introduce a contribution offset of £5,035 – the proposed level of salary offset – to reduce costs. We’ll have to wait and see what eventually comes out of these proposals. Pushing people into saving for retirement is a good thing on the face of it, but it has to be done properly, and without negative effect.
