Personal Accounts Article (November 2009)

There have been some recent updates on the Government�s plans for the launch of Personal Accounts in 2012. Some of the most pertinent changes are detailed below.

From 2012 you will have to classify your workforce as either:

Worker - defined as age 16 to 75 and has a contract with an employer to work for them, working or ordinarily working in the UK,
Jobholder - as Worker and has qualifying earnings, or
Eligible Jobholder - as Jobholder and aged 22 to state pension age.

Eligible Jobholders will be auto-enrolled in Personal Accounts. If Workers or Jobholders become Eligible Jobholders then they must also be auto-enrolled in Personal Accounts. Auto-enrolment is from day one of employment, or upon being classed as an Eligible Jobholder. Qualifying earnings are defined as currently between £5,035 and £33,540 and include any bonuses, commission and overtime.

The Department for Work and Pensions has announced that the Government�s flagship private pension saving scheme will not be completely in place until October 2016, which is much later than the original start date. (Lord Turner�s Pensions Commission originally suggested the scheme should start in 2010.)

The requirement for employees to be enrolled in a pension scheme is to start in October 2012 and the implementation of that requirement is now to stretch over the following 3 years. Millions of employees are to be automatically enrolled into their employers� existing pension schemes or, if pension schemes do not exist, into the new system of Personal Accounts. The latter process will involve hundreds of thousands of small employers contributing to a pension for the first time; a process that in itself will cause an immense amount of administration and cost.

Large employers are to start the process first, with the smallest employers last. However in recognition of the fact that the new approach �will increase the cost of running a business�, both employer and employee contributions will be phased in much more slowly than originally expected.

As we have highlighted in a previous article, when fully implemented, employers will have to put in a minimum of 3 per cent of their workers� pay, with employees putting in 5 per cent minimum, including tax relief. Now however, contributions are to be staged for both employers and employees to enable the effect to be applied across 5 years. So, for the first three years, up to and including 2014, employers will only have to put in a minimum of 1 per cent, then 2 per cent the following year and the full 3 per cent only from October 2016 onwards.

The Department for Work and Pensions (DWP) said: �We believe this approach strikes the best balance between enabling employers to adjust gradually to the cost of the reforms, and increasing pension saving as quickly as possible.� However the Association of British Insurers (ABI) said: �The four year delay before contributions rise to 3 per cent is unacceptable,� adding that the move �puts the success of the reforms at risk�.

Maggie Craig, the ABI�s director of life and savings, said: �It means that no employer will have to pay more than 1 per cent until October 2015. As things stand, employers may be encouraged to ditch private schemes, which benefit from higher contributions, in favour of the state-backed scheme where they could pay just 1 per cent for at least three years.�

Earlier this year, PADA, the authority devising the Personal Accounts system, suggested it might take 12-18 months to enrol all employers but the DWP have said: �Only a longer staging period will reduce the operational risks [of the new system] to an acceptable level.�

Cartlidge Morland considers that the introduction of Personal Accounts, although welcome, could create a complicated and difficult situation for employers. It is possible for an existing pension scheme to be classed as a Qualifying Pension Scheme and therefore remove the need for your workforce to be auto-enrolled in Personal Accounts. This could be one way of minimising the amount of administration and cost involved in adhering to the legislation.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services.

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