Personal Accounts (October 2008)
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The Olympic Games is not the only big event planned for the UK in 2012! The introduction of personal accounts for pensions is something that employers, both large and small, would do well to understand.

For those employers affected, and a significant number will be, failing to plan early enough will see a significant overnight increase in the company’s cost base.

Despite a raft of pension reforms over the past two decades, adequate pension funding remains a real problem for a significant proportion of the working population. Any potential solution continues to be a political ‘hot potato’ but the Government appears determined to take the necessary steps towards compulsory pension funding. For employers this will result in a contribution of 3%.

This briefing document is designed to provide an understanding of the key facts as they currently stand.

In December 2006, the Government published a White Paper, outlining its proposals for personal accounts. These proposals related to the introduction of a straightforward opportunity for employees to contribute to a high-quality, low-cost savings vehicle. The intention is to increase retirement savings throughout the UK and reduce reliance on the State.

The proposed scheme, the National Pensions Savings Scheme, has become known as Personal Accounts, and is due to be introduced in 2012.

Under the scheme employers will be obliged to contribute to a pension for their employees from 2012.

Personal accounts are one way of doing this. Final details of the exact make up of personal accounts are not yet published; however, based on current proposals Cartlidge Morland believe the main points are as follows:

  • The personal accounts scheme will be run as a defined contribution occupational pension scheme targeted at low to medium earning employees who do not have access to an employer’s pension scheme.
  • The Government expects the scheme to include around eight million members, and receive around £8bn a year in contributions.
  • Employers will have to auto-enroll their employees into a pension scheme and pay contributions into their pension scheme, or the new personal accounts scheme.
  • Contributions to personal accounts will total 8% of band earnings, with a maximum of £3600 a year (closer to £5000 in 2012). There will be no transfers in or out of the personal accounts scheme for an initial period.
  • Contributions must be paid as per frequency of remuneration, ie weekly, monthly etc.
The Governance Structure

Personal Accounts will be a trust-based occupational pension scheme overseen by a Personal Accounts Board, with trustees advised by the Consumer Representative Committee, as well as an employer panel. The Pensions Regulator will regulate most aspects of the scheme.

Contributions

The default minimum contribution level for personal accounts will be set at 8% of earnings between around £5000 and £33500. This band will increase each year in line with average earnings inflation.

Employers will be expected to pay a 3% contribution, employees a 4% contribution, and the additional 1% will be made up of tax relief.

The maximum contribution limit has been set at £3600 a year (in 2005 terms), but this will increase each year in line with average earnings before and after 2012. Therefore, in reality, the figure will probably be closer to £5000 by 2012. The Government is also considering allowing a higher contribution limit, possibly of £10000, in the first year. There may also be an additional lifetime contribution limit, which will run alongside the yearly limit. This is intended to help people with irregular working patterns, particularly women, but may serve to add another layer of complexity.

Contributions (to both personal accounts and other pension schemes) will be phased in over a three-year period.

Year

Employee (including tax relief)

Employer

2012

1%

1%

2013

3%

2%

2014<

5%

3%

Contributions must be paid over to the personal account provider at the same frequency as employees are paid, eg weekly, or monthly.

Transfers into and out of the personal accounts scheme will not be allowed for an initial period. The Personal Accounts Board (PAB) will review this in 2017.

The Members

Employees between age 22 and the state pension age, and earning above approximately £5000 a year, will be automatically enrolled into either a qualifying pension scheme or a personal account.

There will not be a waiting period before auto enrolment into personal accounts (although qualifying pension schemes can have a waiting period of up to three months).

If employees do not want to become members of the personal accounts scheme, they can choose to opt out.

If they choose to stay in then the employer has to contribute 3% of band earnings. Therefore, although pension provision is compulsory for employers, take up is optional for employees.

Those who opt out will probably be re-enrolled automatically after three years, and again be given the chance to opt out at this stage.

Those aged between 16 and 22 or above state pension age will be allowed to opt into personal accounts and, if they do, employers have to contribute for them. Self-employed workers will also be eligible to join, although clearly there would be no employer contribution.

Exemptions

Employees that have access to their employer’s own pension scheme may be exempt from being automatically enrolled into personal accounts. Exemptions will be for members of defined benefit (ie final salary) schemes that meet the prescribed benefit levels and for members of defined contribution schemes that have a minimum level of employer contributions. Any qualifying period cannot exceed 3 months.

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