NAPF: Pensions Bill must be changed

NAPF says pensions bill must change to avoid unnecessary costs to workplace pensions and to avoid undermining retirement savings for low earners.

According to the National Association of Pension Funds (NAPF) and other industry bodies (see notes to editors), the Government risks undermining both retirement savings for lower earners and leaving each pension scheme with a £25,000 - £100,000 bill if they do not revise the definition of Qualifying Earnings (“pensionable pay”) in the current Pensions Bill. This issue is due to be debated in the House of Lords on Tuesday 17th June.

Joanne Segars, NAPF Chief Executive, said:

“We support the Government’s 2012 reforms but it is important that they do not add unnecessary costs to existing pension provision.

“All that is needed is a common sense change to the definition of Qualifying Earnings and we should see a good outcome for everyone.

“Ministers have underlined that they want the new Personal Accounts scheme to have a minimal impact on existing provision so we are hopeful that they will try to accommodate our concerns.

“Existing workplace pensions are generally of higher value than the new statutory minima to be introduced in 2012. Nothing should be done to undermine good provision.”

The current Pensions Bill, due to be debated at the House of Lords on Tuesday 17th June, states that all employee pay between £5,035 and £33,540 should be subject to pension contributions from 2012. However, virtually all of today’s pension schemes use a very different basis for contributions – usually Basic Pay or Basic Pay plus certain agreed amounts. Currently, 83% of FTSE-100 companies use total basic earnings as the basis for contributions. The way the Bill is currently worded will lead many employers to conclude that they must amend the rules of their pension scheme with considerable costs as a result.

The NAPF and other industry bodies want the definition of Qualifying Earnings for pensions that have already been set up (or are close to being set up) to be allowed to remain as they are - using a definition related to basic pay (or Basic Pay plus any pay on which pension contributions are also payable). Personal Accounts would be able to go on using the segment of pay set down in the Bill. To ensure that no individual would lose out, they are also proposing that a calculation should be made at the end of the year (“annual reconciliation”).

The impact of the Government’s proposed definition would have different consequences for different groups:-

Employees

According to recent surveys of NAPF and ABI members the most likely reaction, if no amendment is made, by employers who currently offer a workplace pension will be to change the definition of pensionable pay used by their existing pension scheme to the new definition of Qualifying Earnings set out in the Bill.

If this is applied, by disregarding the first £5,035 of earnings for an existing workplace pension, lower earners joining a pension scheme will lose out. For example, currently many employees earning £12,000 would have their pension and employer contributions based on the whole of that salary. However, if the Qualifying Earnings banding is used, they would only have their contributions based on £6,965 (£12,000 - £5,035).

Employers

As outlined, employers and pension scheme providers believe that because of the definition of Qualifying Earnings, employers will choose to alter their pension scheme’s rules so they match the definition.

It is estimated that due to these changes, there would be one-off costs to employers of £25,000 – £100,000 per scheme (legal, actuarial, communication and negotiation costs).


ENDS

Notes to editors

Industry bodies
Association of British Insurers (ABI)
National Association of Pension Funds (NAPF)
Institute of Chartered Accounts in England and Wales (ICAEW)
Society of Pensions Consultants (SPC)


About The National Association of Pension Funds Limited

The NAPF is the leading voice of workplace pension provision in the UK. Some 10 million working people are currently in NAPF Member schemes, while around 5 million pensioners are receiving valuable retirement income from such schemes. NAPF Member schemes hold assets of around £800bn, and account for approximately one fifth of investment in the UK stock market.

Journalists requiring further information, please contact Mark Brooks via

020 7808 1312 mark.brooks@napf.co.uk 07917 506683

Mark Brooks
Head of Press
Tel: 020 7808 1312 07917 506 683
Fax: 020 7222 7585
http://www.napf.co.uk

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