Memorandum submitted by AIFA (PE 04)







AIFA has indentified the following key issues in the Pensions Bill 2007 that could potentially cause investor and industry detriment:


Personal Account Lump Sum Contribution Limits

Levelling Down of Existing Pension Schemes

Personal Accounts & Means Tested Benefits

Definition of Qualifying Earnings

Personal Account Advice for Employees and Employers


These are only AIFA's initial concerns. We have asked our Members for their views and are conducting further analysis on the Bill's proposals.


Personal Account Lump Sum Contribution Limit


Clause 53(1) of the Pensions Bill permits the Security of State to prescribe the maximum amount of contributions that may be made to Personal Accounts in any tax year. Subsection (3) of Clause 53 permits the Security of State to prescribe payments that may be made by a member, which are not contributions; this would include lump sum payments to Personal Accounts.


In the Personal Account White Paper the Government proposed "a contribution limit of 10,000 in the first year of personal accounts"[1] to support saving between now and 2012. The pensions industry was very concerned that any provision to allow people to make lump sum contributions to Personal Accounts would severely threaten existing schemes, but finally accepted that this would not be a problem if the lump sum contribution was a one-off and capped to 10,000 in the first year.


Clause 53 (3), as drafted, allows the Secretary of State to allow lump sum payments to Personal Accounts more than once without any statutory limit. This provision will not only threaten existing personal pensions, but it could lead to severe investor detriment. The provision would allow investors to invest large sums of money into Personal Accounts without any personal advice on whether the Account is the most suitable way of saving or if they would be financially better off investing in other pensions or investment products. Without professional advice, investors also may not be diversifying their portfolio and could have restricted or no access to more lucrative investment. Considering the consequences of this provision from an industry perspective, it would be incredibly difficult for financial advisers advising their clients on financial planning generally, if it is unknown when and what lump sum contributions might be allowed if such contributions were set by the Government on an ad hoc basis.




We recommend that Clause 53 is amended to include a fixed sum (approximately 10,000) to Subsection (3) and to allow for Subsection (3) to be repealed without repealing the rest of the Clause.


Levelling Down of Existing Pension Schemes


The Bill will require every employer to either make provisions for employees to join Personal Accounts or auto-enrol employees into existing schemes that have an employer contribution of at least 3% and total contributions paid by the employer and employee of at least 8% (Clauses 14-26). A significant proportion of firms already provide existing group pension schemes with contribution levels higher than this requirement, but as auto-enrolment is currently not permissible into contract-based schemes, they only provide these benefits to those that join. Barriers that prevent auto-enrolment should be overcome where possible to allow good existing schemes to continue. If they are required to auto-enrol all employees, they could well choose to lower the contribution they make to the minimum required by the Bill. This risks a proportion of employees seeing their pension potential fall considerably.


There is also the possibility that an employer may not be in a position to maintain contribution levels higher than 3% if applied to all employees. The alternative would be to set up Personal Accounts for all employees, rather than maintaining two schemes running concurrently.


Personal Accounts need to focus on those who currently do not benefit from an employer sponsored scheme.




AIFA believes that the Bill needs to be amended to ensure that levelling down does not happen for existing schemes that provide a higher contribution than the minimum required by the Bill; we are working on a draft amendments to propose to this effect.


Personal Accounts & Means Tested Benefits


There are people that would be financially better off by opting-out of Personal Accounts because of the means tested benefits systems, especially those that are close to retirement age in 2012. One of the problems is the lack of advice available to employees on whether it would be financially better for them to opt-out of Personal Accounts and rely on means tested benefits or to stay in Personal Accounts. It is possible that employees will rely on hearsay information from ill-informed sources or seek advice from employers who will be unable to provide it.




People that decide not to opt-out of Personal Accounts and responsibly save for their future should not be worse off in retirement then those that decide to opt-out and rely on state benefits. We accept that it may not be profitable for many IFAs to provide advice to employees on Personal Accounts, but it is important that employees receive adequate information, or where possible, individual advice. This could be achieved through pro-bono work of IFAs, or paid for by employees or employers. The Thoresen Review should deliver a mechanism for the provision information on Personal Accounts, but not individual recommendations.


Definition of Qualifying Earnings


Contributions to Personal Accounts will be based on all earnings (including overtime, bonuses and commission) falling between upper and lower band earnings. In general, group pension schemes base contributions on basic salary. It could be extremely difficult to determine accurately whether a scheme would meet the exemption criteria when Personal Account qualifying earnings could vary significantly both initially and on an on-going basis.




Consideration needs to be given to a simplified approach, possibly a form of averaging, to enable employers to establish whether an existing scheme is providing adequate provision to meet the exemption criteria.


Personal Account Advice for Employees and Employers


The Bill does not make any provisions for advice for employers or employees. As other sections of this briefing note indicate the case to stay in or opt-out from Personal Accounts will not be a simple decision for many. Employees will also need advice on their existing scheme or any previous pension and to decide whether it would be more suitable to opt-out of Personal Accounts and continue with another scheme. Advice and reviews help ensure adequate contributions are made. Employers will need advice on whether their existing scheme is sufficient for an exemption from Personal Accounts.




Currently, employers that pay for financial advice for their employees can only reclaim corporation tax if the advice costs less than 150 per person. If the advice costs more than 150, then none of the cost can be off-set against corporation tax. Also, employees are taxed on any sum over 150 as a P11D benefit. This is different to most other tax allowances, which allow tax to be claimed back to a proportion of the cost if the total cost is higher than the threshold. We recommend that the Government change this anomaly in the forthcoming Finance Bill, which will encourage more firms to offer financial advice to their employees.


The role of advice generally needs to be considered in the Pensions Bill. We hope that the Thoresen Review will find some solutions to this problem, but it is essential that any new scheme that is established does not mix generic information with personal advice.


About AIFA


AIFA was launched in September 1999.  Our role is to lobby the Treasury, the Financial Services Authority, MPs, the EU and other opinion formers and policymakers to bring about a more positive regulatory and business environment for members. 

It is AIFA's objective to play a critical but constructive role within the regulation process - offering insights from the "front line" of the market. 

AIFA is a non-commercial, not-for-profit trade body.  We exist solely to campaign for light touch and proportionate regulation and work for a positive market for members.


About the intermediary profession


The professional advice community is a strong and growing sector. Latest results from a market study by Deloitte show:


There are over 16,000 adviser firms in the UK, employing 128,000 people.

Intermediaries accounted for 62% of regular premium sales and 66% of single premium sales in the life industry in 2005.

Total new business advised on by the professional advice community rose by 16% in the years from 2000 - 2005.

Around 70% of firms employ 1-2 people but have a turnover of 382,000 per annum.

Overall, the intermediary sector's turnover was 6.5bn in 2005.

The overall operating profit for the professional intermediary community is 13% of turnover.

Around 45% of the UK adult population have consulted a professional financial adviser.

16% of the population regularly use a professional financial adviser.


The Value of Advice


Research by Deloitte illustrates the benefits of receiving personal financial advice:


60% increase in net assets by age 60 achieved through better management of debt, improved budgeting, better selection of financial products.

Four-fold increase in pension fund at retirement.

Increase in private pension of 2,100 per annum and an average decrease in pension credit by 600 per annum.

An average increase in consumption of 50,000 over a person's lifetime.

A two-thirds reduction in the proportion of people facing financial stress (defined as periods where all financial assets are drawn down).

A saving of 50m - 100m within ten years in savings made to pension credit.

The delivery of advice has the potential to improve wealth of target groups from 39bn to 78bn if only 10% were to optimise fully the advice given.


January 2008

[1] DWP, 'Personal Accounts: A new way to save', December 2006