Memorandum submitted by Which?


Which? strongly supports the objectives of the Pensions Bill which will establish in 2012 a new pension scheme - Personal Accounts - broadly as outlined in the December 2006 White Paper, 'Personal Accounts: a new way to save'. As a result, we hope between six and nine million more consumers will have access to a workplace pension. The Government estimates that pension contributions will be boosted by around 10 billion by 2015.

Which? believes:

> This is an important step forward in the creation of a long-term solution which will empower many consumers to make better provision for their retirement.

> The Personal Accounts Delivery Authority (PADA) must place the consumer interest at the heart of personal accounts between now and 2012. We are delighted they have already established an advisory consumer panel.

> A strongly governed system of Personal Accounts will be key to ensuring greater retirement savings.

> All pension saving has a relationship with future availability of state benefits. Personal Accounts are no different in this respect to current private pension saving.


Which? also acknowledges the effective way in which the Department for Work and Pensions has engaged with key stakeholders in the development of the bill prior to publication on 5 December 2007. This has helped ensure the bill is a good one which consumers can have confidence in. However there are still some issues of concern or areas which will need further clarification during the parliamentary process, especially as the bill is a framework and most detail will be left to secondary legislation or for PADA to develop.


This briefing note sets out the initial view of Which? to the main provisions of the Pensions Bill ahead of 2nd Reading on 7/1/08 and scrutiny before the Public Bill Committee. The briefing note is laid out in the order of the bill.


Part 1: Chapter 1: Clauses 1-26

Employers' Duties


Clause 3: auto enrolment & Clause 5: auto re-enrolment


Which? supports automatic enrolment for all employees (Clause 3) unless the Government can identify that there will be an overriding adverse impact on an identifiable group of individuals from auto-enrolment. We also support auto re-enrolment (Clause 5). The bill does not specify the time period but we understand the regulations will set this at three years for those employees who originally chose to opt out.


Which? believes clear information solutions should be provided to assist those people who would not benefit to opt-out.


Clause 11: Qualifying Earnings & Clause 12: Review of earnings band


Which? is pleased that qualifying earnings will include more than basic pay but also commission, bonuses and overtime, as well as relevant state benefits. We also welcome that the level of the qualifying earnings band will be reviewed annually.


Clause 14: Qualifying schemes


Which? believes non-occupational schemes should have to meet a series of tests to ensure they deliver appropriate pension provision. The tests should include ensuring that there is appropriate governance in place to protect members' interests from excessive charges or poor investment performance, a fair system of auto-enrolment and provision of a suitable default fund.


To achieve this Which? favours a master trust model because of the benefits that a trust structure would offer in looking after consumers' best interests[1].


Part 1: Chapter 2: Clauses 27-45: Compliance


Which? has no objection to the Pensions Regulator being the compliance body for Personal Accounts.


Which? supports a proportionate and effective compliance regime to ensure that consumer rights are safeguarded. A fundamental purpose of any penalty regime must be to ensure that there is sufficient compensation for employees who have missed out on contributions due to non-compliance by their employer.


Clause 31 sets out the way a compliance notice will be enforced. Clause 31 (2) (c) specifies that an employer will have to pay an employee's contributions after a set period. We hope that this period will be no later than after 3 months of non-compliance.


Part 1: Chapter 3: Clause 46-49: Protection of Employment Rights


Which? welcomes that employees will gain new employment rights relating to their right to join the personal accounts scheme.


Part 1: Chapter 4: Clauses 50-60 & Schedule 1: Powers to establish a pension scheme


Clause 52: Consultation & Clause 57 / Schedule 1: Trustee Corporation

Which? is delighted that the Secretary of State's powers to establish a pensions scheme will put consumers at the centre of the governance of Personal Accounts.


We therefore welcome that:

-PADA has already established a consumer advisory panel. It first met on 23 November 2007 under the chairmanship of PADA non-executive director, Jeannie Drake.

-The trustee corporation will have a members' panel (Clause 52) which it must consult though we seek greater clarity as to how the members' panel will represent members and how it will be appointed.

-The trustee corporation will have 9-14 members (Schedule 1). We seek reassurance as to how consumers - both members and prospective members will be represented on it.

-The trustee corporation will also act as Non-Departmental Public Body (NDPB). We seek reassurance that the scheme (as a NDPB) will be able to effectively promote itself to prospective members, given that the trustees can only act in the best interests of current members.


Clause 53: Contribution Limits

The bill does not specify what the contribution limit will be, but the Government has already announced that secondary legislation will set a limit of 3,600 per annum[2] under Clause 53 (1).


Which? had hoped the contribution limit would be higher than this amount; we had argued for a limit of 5,000 per annum.


We do however welcome that this annual limit will be uprated in line with earnings. We believe any less than the Government proposed would risk placing a cap on people's aspirations for a comfortable retirement.


In fact, with a contribution limit of 3,600, an individual on median earnings of 23,000 would only have to make an additional contribution of 145 a month before they would be restricted by the cap[3]. This figure will be further reduced if they work for an employer who is more generous and contributes more than the compulsory 3%.


In summary, Which? would support a more flexible contribution limit than that proposed by the Government because:

-It will empower savers to make additional provision for their retirement. The Personal Accounts Board will be given a duty to encourage saving above the minimum level of contributions.

-It will allow people who take career breaks or have fluctuating incomes to make up contributions in other years.

-Anyone wanting to make contributions slightly above the annual limit may struggle to find an appropriate pensions vehicle outside of personal accounts.


Lump sum lifetime limit

Which? believes the Government should also examine the feasibility of establishing a lifetime limit in addition to the annual limits to allow consumers to pay in lump sums, such as inheritance, redundancy payments or bonuses. We therefore welcome the power contained in Clause 53 (3) to enable lump sum contributions.


Transfers in and out

Which? welcomes that a review of whether to allow transfers in and out of the personal accounts scheme will be made in 2017 (after 5 years). We are pleased that the Government now proposes to allow transfers in to personal accounts of the cash transfer sum of people who leave qualifying schemes before reaching the end of the vesting period.[4]


Part 1: Chapter 5: Clauses 61-68: Personal Accounts Delivery Authority


Clause 62: Principles

Clause 62 sets out the principles which PADA must follow in carrying out its functions. We suggest that these principles include an additional one to require PADA "to act in the best interests of prospective members" in the period up to 2012.


Clause 62 (2) (a) states PADA must encourage and facilitate participation in qualifying schemes. We seek clarification that this principle is not too broadly worded as it might mean PADA's role extends beyond the development of Personal Accounts from 2012 to a different role promoting all types of pensions.


Clause 62 (2) (c) states that PADA must minimise the adverse effect on qualifying pension schemes. We would prefer if this stated that it must minimise the impact on other high-quality pension provision. Clauses 18-24 set out the quality requirements, in particular of personal pensions (Clause 24). We seek reassurance that this will not undermine the impact of Personal Accounts because they must be the best possible scheme for the target market.


Clause 62 (2) (d) states that the "cost of membership of a scheme....should be minimised". We seek clarity that this refers to the cost of the scheme to consumers. Which? believes a low-cost scheme with a target Annual Management Charge (AMC) of 0.3% per year is the most appropriate charging structure because it is simple to understand, comparable with other forms of saving, fair for low earners and will maximise participation in the scheme. Any alternative charging structure proposed must be seen to create a better outcome for consumers than an AMC.


Which? believes that there should be no extra charges levied for: changing jobs, changing name and address details, temporary cessation of contributions, variation of contributions and additional lump-sum contributions. But additional charges could be levied for: a) where account holders choose branded funds, they should bear the additional costs of those options with no leakage of costs back into the bulk-bought funds, and b) excessive switching between investment funds, though account holders could be allowed a small number of 'free' switches per year.


Clause 62 (2) (e) requires PADA to take account of members' preferences about investment choice. The White Paper indicated that there will be a three-tiered approach to investment choice:

-A default fund for members who do not wish to exercise choice;

-A small number of bulk-bought funds at low charges; and

-A wider range of funds, expected to include social, environmental and ethical investments and branded funds.


Which? believes

-Managed choice with a limited number of funds graded by risk is the best option for consumers but we seek clarification from PADA as to how funds will be added or removed from the choices on offer and what will happen to underperforming or higher charging funds.

-To aid comparability, information about the various funds available should be standardised and provided by the Personal Accounts Board.

-The default fund will need to invest in a wide range of assets to reduce the risks associated with the performance of specific assets and is also likely to incorporate a degree of lifestyling. PADA will need to consult experts and develop the most appropriate default fund for the target market.

-Any supplementary branded provision in addition should not add costs to the system.

-Participants in personal accounts shouldn't be unfairly penalised for their religious beliefs or ethical principles.


Other issues relating to the Pensions Bill



1. Robust generic advice and information


Which? believes the success of Personal Accounts will require good communication and appropriate advice systems for both employers and employees. We believe that information and advice needs for consumers will be required in two important areas:


1. The initial decision on whether or not to opt-out of Personal Accounts.

2. Ongoing advice and information needs. This covers areas such as investment choice, additional contributions and the impact that varying contributions might have on a member's pension pot.


Which? believes:

-a simple, universal scheme of personal accounts is crucial

-generic advice arrangements on a one to one basis, probably through a telephone advice line but possibly supplemented by face-to-face provision must be included.

-a wide range of organisations will need to be involved in communicating information about personal accounts. This will include Government departments, the FSA, employers, trade unions and voluntary organisations.

-The information strategy for Personal Accounts should meet the challenge of including hard to reach groups such as migrant workers.

-Information could be disseminated through employers but there would be cost implications for smaller employers and a risk of some employers not passing information on.


Which? believes information and advice discussions would be best tied into the Treasury consultation on a ten year financial capability strategy. We also welcome the ongoing work of the group chaired by Otto Thoreson of AEGON to research and design a national approach to generic financial advice[5]



2. Means testing


The interaction between Personal Accounts and means tested benefits is perhaps the most contentious issue. While we acknowledge that it is a legitimate concern, we do not believe this concern need derail Personal Accounts. The recent policy papers produced by Age Concern England[6] and the Pensions Policy Institute[7] back up our contention that the interaction with means tested benefits can be managed with appropriate policy decisions.




Which? believes:

-Clear information should be provided to enable the small minority of people who would not benefit to opt-out.

-For many employees, the introduction of a low-cost personal accounts scheme with matching contributions should provide higher incentives to save than existing personal or stakeholder pension schemes without an employer contribution.

-We must recognise that people's circumstances are fluid and move up and down the income scale, receive unexpected windfalls or incur unexpected costs and relationships form and dissolve. For example, around 20 per cent of those aged 50-59 in the lowest income quintile expect to receive an inheritance in the next ten years. This figure rises to 30 per cent for those around average income.

-In an opt out system, the individual can exercise a right not to participate. At the end of the day, there will be a personal responsibility to be exercised.


Which? believes the DWP should undertake further research into whether there are certain categories of people (such as those on multiple benefit tapers) who might reasonably be expected not to benefit from saving in personal accounts. In our view, the ability to trivially commute small pension pots provides an important backstop against people losing out from saving in personal accounts.[8]





Which? works together with Age Concern, the Equality and Human Rights Commission, Help the Aged and Trades Union Congress as the People's Pensions Coalition - a group of consumer and advocacy groups committed to a progressive pensions settlement.





January 2008


[1] Which? letter to Minister for Pensions Reform, 16.11.07

[2] In 2005 earnings terms uprated annually in line with earnings

[3] A median earner would make a default contribution of 1,450 a year and would have room to increase contributions by around 2,150 a year. This calculation assumes that tax relief will be available at the basic rate, so to make those additional contributions would reduce net pay by around 1,730 per year, or 145 per month.

[4] Page 84, Paragraph 3.78, Pensions Bill Impact Assessment, 5/12/07


[6] Age Concern England, Policy Paper: Personal Accounts and Mean Testing, Dec. 2007

[7] Pensions Policy Institute, Increasing the Value of Saving in Personal Accounts, Nov. 2007

[8] Pensions Policy Institute, Are Personal Accounts Suitable for All, Nov. 2006