Memorandum submitted by Fidelity International (PE02)
Fidelity International is the one of the UK's largest fund management groups and we have a wealth of experience to bring to the debate on the future of private and State retirement saving policies.
In addition to our position in the UK, we are also able to draw on the experience of our sister company in the USA, Fidelity Management and Research (FMR), which is that country's largest provider of 401(k) savings / retirement plans.
Although we offer products and services across the spectrum, we have a particular expertise in defined contributions (DC) pension schemes.
During the months leading up to publication of the Pensions Bill, we have met with many government officials to share our expertise in DC Scheme design, Modelling Tools, Administration and Investment. We are committed to supporting the improvement of Britain's retirement prospects, but not at any cost - existing good provision must not be sacrificed as a result of Personal Accounts.
Our principal concerns arising from the Pensions Bill and its associated documents centre on the following areas:
1. features understood to have been agreed, that are not articulated in the Bill;
2. exemptions for existing schemes.
This submission provides more detail on each of these and proposes alternative solutions.
1. Known features not mentioned in the Bill
1.1 Employer Contribution Levels : throughout the evolution of Personal Accounts design, the government has made clear that employer contribution levels will be set at 3% of gross earnings (between £5,035 and £33,540 in 2007/08 terms). However, this is not clearly articulated in the Pensions Bill itself. We believe this point should be made explicit in the Bill so that Employers can be sure of their future responsibilities, and be in a position to plan for their introduction.
1.2 Contribution Phasing : in addition, the government has been clear that employer contributions to Personal Accounts will be phased in over 3 years from 2012, starting at 1% in 2012/13, increasing to 2% in 2013/14, and 3% from 2014/15 onwards. Again, this is not explicitly provided for in the Bill in a way that we believe would make it easier for employers to understand their obligations.
1.3 Contributions Cap : Following the announcement that the annual Contributions Cap was to be set at £3,600 in 2005/06 terms, rising in line with salary inflation, we had expected this to be articulated in the Bill, and believe that it should be set in primary legislation, to ensure absolute clarity.
1.4 Allowable Contributions : Without clarity of the types of contributions allowable into the Personal Accounts scheme, there is a danger that members may attempt to consolidate their pension arrangements, by transferring previous schemes' fund values into Personal Accounts. The government has been clear that this will not be permissible, certainly in the early years, and we believe that this should be expressly covered in the Bill, rather than being swept up into the open-ended statement in clause 53(2).
1.5 Power to scrap contribution levels : Under clause 53(5), the Secretary of State is granted the power to repeal the entire section on Contribution Levels. This is, in our opinion, too wide and general a power and should be more explicitly worded to ensure that Personal Accounts retain their stated objective to "complement not compete with" existing private provision. It will also give employers clarity about their future financial responsibilities.
2. Exemption Tests for Existing Schemes
2.1 While supportive of any mechanism that permits existing schemes to exempt themselves from the requirement to provide Personal Accounts if contribution levels are broadly equivalent to the Personal Accounts minima, we believe that the current wording of the Bill regarding contribution equivalence will result in significant additional administration for employers.
2.2 The vast majority of existing pension schemes use a pensionable salary definition of "basic salary" at a given point, and contributions are calculated and paid based on this definition. While accepting that this definition does not allow for overtime, bonuses and statutory pay, there is neither a lower off-set amount (£5,035 under Personal Accounts), or a ceiling (£33,540 under Personal Accounts).
2.3 If wide-spread closure of existing schemes is to be avoided, it is vital that the contributions test for exemption is simple and easy to check. We would urge government to re-consider their approach, adopting a simpler test to ensure the continuation of existing good employer-sponsored pension provision. 8% of total basic salary with no off-set should provide equivalence to 8% of total gross earnings between the lower and upper limits for the majority of employees1.
2.4 The government has mooted a number of possible work-arounds to ensure exemption for existing contract-based schemes, which the government believes are excluded from auto-enrolment under EU legislation. Our own view, however, is that this issue needs to be explored further.
2.5 In addition to the three possible alternatives, we recommend that employers who provide written contracts of employment for their employees, and who include a clause authorising deduction of contributions from earnings, should be permitted to operate "auto-enrolment" for their employees, and thus obtain exemption from the requirement to operate Personal Accounts. By providing a signature authorising contribution deductions, the pension scheme is taken out of the scope of both the Distance Marketing Directive and the Unfair Commercial Practices Directive, while the employee is not required to make any further active decisions regarding their pension scheme membership.
2.6 We have some concerns regarding Master Trusts as an alternative to contract-based Group Personal Pension schemes. If selected, they may simply be a mechanism to circumvent EU legislation. Employers choose contract-based schemes for a number of reasons, including additional flexibility, portability, and reduction in administration and management time. Many employers maintain strong governance controls, despite the lack of legal requirement to do so, because the welfare of their employees is of paramount importance to them.
2.7 Implementing Master Trusts for employees who join an employer after 2012 will create a minimum of a two-tier system (and potentially three-tier, if the employer has historically had a Defined Benefit Scheme now closed to employees) that is likely to be unpalatable to employers, unions and employees alike. Pre-2012 employees would continue to have the flexibility and choice that comes from a contract-based scheme, and post-2012 employees would be members of a Master Trust scheme, potentially with lower contribution rates to accommodate the additional cost resulting from the extra regulatory requirements. We do not believe that this is the government's intention, and would strongly recommend that an alternative work-around is found.
2.8 With most Group Personal Pension & Stakeholder schemes being contract based, it would not be possible to restructure them into a master trust in a seamless manner. This would present some administrative challenges including the need to seek employee consent before converting the scheme from contract to trust status.
2.9 Keeping in mind the over-arching intention to "complement rather than compete with" existing provision, we believe that the requirement for Master Trusts, if introduced, would result in some negative activity in the pensions industry, particularly relating to the "churning" of existing business. This practice, of moving pension schemes from one provider to another, can produce significant income (whether fee- or commission-based) for an adviser, to the detriment of both individual members, and providers.
2.10 It should also be remembered that few pension providers offer Master Trusts at present, and the additional product development costs would be substantial.
2.11 There is a risk that if employers are forced into changing the structure of an existing scheme in order to qualify for an exemption, they may decide to abandon the existing arrangement in favour of a new replacement Personal Account vehicle. With average contribution rates into existing private contract-based schemes being broadly double the minimum proposed for Personal Accounts, there would also be a clear fiscal incentive for Employers to take such a radical course of action.
1. In estimating the impact of a simpler approach to the exemption test, the following data has been used :
2007 Annual Survey of Hours and Earnings :
Median Gross Annual Earnings : £26,300
Median hours worked per week : 39.4 hours per week
Median hourly pay excluding overtime : £11.34 per hour
Personal Accounts Contribution Calculation :
£26,300 - £5,035 = £21,265 x 8% = £1,701.20 per year contributions
Basic Salary with no offset calculation:
39.4 hours x £11.34 per hour x 52 weeks = £23,233,39 x 8% = £1,858.67 per year contributions