Memorandum submitted by NAPF





December 2007




1. The National Association of Pension Funds (NAPF) welcomes the Pensions Bill published on 05 December 2007, introducing automatic enrolment, a minimum employer contribution, the Personal Accounts Scheme, the extension of the role and responsibility of the Personal Accounts Delivery Authority (PADA) and pension simplification. The NAPF has been supportive of the Government's proposals which will give 7 million working people access to a pension for the first time.


2. We also support the pensions simplification measures which is an important first step in what must be an ongoing simplification and deregulation programme aimed at helping maintain and sustain occupational pension schemes.


3. However, there are a number of issues which we believe the Bill does not adequately address. These, together with NAPF proposals for strengthening the Bill, are outlined below.




4. 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 some 800bn, and account for over one fifth of investment in the UK stock market. A key objective for the NAPF is to help ensure the long-term future of good workplace pension schemes.














Target Group for Personal Accounts and the Personal Accounts Delivery Authority - Functions and guiding principles


5. The NAPF is concerned that if the Personal Accounts scheme is poorly targeted the many millions who are currently saving in today's high value workplace schemes may receive smaller pensions. This would arise if employers offering good pensions today choose to level down by placing their employees in the Personal Accounts scheme (at a lower contribution level) rather than maintaining their existing high quality scheme. The risk of levelling down is now insignificant. Excluding deficit correction contribution, a record 21bn was contributed to occupational pensions last year. Employers are currently contributing, on average, 16% of salary to DB schemes and an average employer contribution to DC schemes of 7%, both well above the minimum employer contribution of 3% to Personal Accounts. The cost to employers of automatically enrolling jobholders into existing workplace pensions at current contribution levels will be around 1 - 2bn. Furthermore, the latest Annual Survey from the NAPF shows that 75% of existing schemes will need to make changes to take account of the 2012 reforms. Ensuring that the impact on schemes is kept to an absolute minimum is essential. It is therefore essential that Personal Accounts do not undermine existing workplace arrangements.


6. To ensure Personal Accounts are targeted at those who cannot currently save in a pension that comes with their job it is essential that PADA's objectives are properly defined. The current principles are not explicit enough to ensure that Personal Accounts are targeted at the right group. The Government has said that the Personal Accounts scheme will have a number of features designed to ensure that it remains targeted at moderate to low earners who do not have access to good quality workplace pension provision. Targeting the scheme in this way will help to ensure that employers who currently provide good quality pensions continue to do so. We think that one of the guiding principles for PADA should be to ensure that the Personal Accounts scheme remains properly targeted.


7. The NAPF welcomes the establishment of PADA. We support the clauses in the Bill setting out the functions and guiding principles for PADA. However, we believe the Bill should be amended to ensure the guiding principles include clauses for PADA to properly target Personal Accounts at those without access to a workplace pension and that in designing the Personal Accounts scheme they do everything possible to minimise the impact on existing arrangements.


What the Bill does

8. The Bill broadens the Personal Accounts Delivery Authority's remit to enable it to oversee the establishment of the Personal Accounts scheme. This power allows PADA to start negotiating contracts and developing the necessary systems for the scheme. The Bill outlines the main functions for PADA and the guiding principles under which PADA will operate.


9. As currently drafted the Bill does not go far enough, either in focusing the scheme on the target group or in minimising the adverse effects on existing schemes


NAPF recommendation

10. We believe that PADA should have clear statutory objectives from the start that should be intrinsically linked to the main functions and ensure that the scheme design and implementation does not have an adverse impact on existing workplace pensions.

11. The Bill should be amended to include an objective to minimise, rather than have regard to, any adverse effects that Personal Accounts may have on existing good quality pension provision. It should also include a clear definition on the face of the Bill of the target group for Personal Accounts.


Workplace personal pensions - automatic enrolment


12. The Bill gives the Secretary of State powers to allow workplace personal pensions (WPPs) to act as qualifying schemes provided they meet certain minimum standards. However, EU law (the Distance Marketing Directive and the Unfair Commercial Practices Directive) means WPPs are currently unable to operate automatic enrolment. In this event, WPPs would be able to operate lighter joining methods (such as streamlined joining) than those in place for occupational pension schemes, which will be required to operate full automatic enrolment.


13. Such an outcome would undermine the whole reform proposals. Government has said that automatic enrolment is the cornerstone of the reform. If a loop hole is created that allows some types of schemes to use a different technique, which could result in lower take-up rates, we believe it will create an un-even playing field and risk some serious unintended consequences. The NAPF believes that a solution can be found that would allow auto-enrolment in to WPPs, in a manageable and affordable way, by establishing WPPs under master-trusts.


What the Bill does

14. Clause 3 introduces the employer obligation to automatically enrol jobholders between 22 and state pension age into an automatic enrolment scheme. Subsection 5 gives the Secretary of State power to exempt employers from the obligation to auto-enrol jobholders where the qualifying scheme which the employer uses to discharge his obligation is a personal pension scheme.


15. This allows WPPs (group personal pensions and group stakeholder pension schemes) to meet the requirements of an exempt scheme without having to apply automatic enrolment. The NAPF believes that this could undermine the fundamental principal upon which the whole reform process is built, namely that ALL eligible jobholders are automatically enrolled thereby overcoming the inertia that has resulted in the pensions shortfall the reforms are trying to plug.


NAPF recommendation

16. Currently EU legislation bars WPPs from being able to apply auto-enrolment. However, to avoid any unintended consequences and an un-even playing field between WPPs and occupational pension scheme, we believe a solution must be found that enables automatic enrolment to be applied to WPPs. To enable WPPs to operate automatic enrolment would require either a change to European legislation or for WPPs to be re-classified as occupational pensions. Although it may just be possible to change EU legislation, it is far from certain that it could be achieved by 2012 or that the UK would get the outcome it wants.


17. The NAPF believes a solution can be found. To establish WPPs as occupational pension would require the provider of the WPP to establish a master-trust. Master-trusts are trusts set up by an insurer (i.e. the provider of the WPP) under which the WPP is then operated. An employer would be able to join a master-trust by signing a deed of adherence. Beyond that the employer's obligations remain the same as they would under a normal WPP i.e. they pay the employer and employee contribution on time to the provider.


18. If such a solution can not be found clause 3 should be amended to prescribe the exact circumstances under which WPPs can achieve the qualifying scheme status.


Personal Accounts contribution limits and transfers in and out

19. We fully support the proposal for an annual contribution cap. The Government has said that the cap will be introduced at 3,600 (in 2005 earnings level, uprated in line with average earnings growth from 2005) we believe this is an important measure.


20. We also support the Government's proposal that there will be no transfers in or out of Personal Accounts. This will send a clear signal that Personal Accounts are intended to be distinct from existing provision. It will also minimise the destabilising effects of Personal Accounts on existing pension schemes during the transition period. The restriction on transfers is due to be reviewed in 2017. We believe this policy should be contained on the face of the Bill.


What the Bill does

21. There is a requirement under clause 53 for the Secretary of State to set a maximum amount a member of the Personal Accounts scheme can contribute in a tax year. Clause 53 does not state what that contribution limit will be and neither does the clause indicate whether there will be a higher cap in the first year that Personal Accounts are established.


22. There are no references on the face of the Bill that prohibit transfers-in or transfers-out of Personal Accounts.


NAPF recommendation

23. We believe it is important that the annual contribution limit should be set on the face of the Bill. We feel that further analysis of a 3,600 cap is required given that new research from the DWP shows that 30% of employers contributing 3% or more say they will level down to 3%, with a further 19% saying they have not yet decided how they will respond. The NAPF is looking closely at the new research and RIA. We will provide the committee with further briefings on the cap if necessary, following our analysis. We believe it is reasonable to allow a higher contribution cap of 10,000 in year one, as proposed in the December 2006 Pensions White Paper, to help any individual who may want to move any non-pensions savings into Personal Accounts.


24. The Government should review this limit on a regular basis to ensure it is adequate and not undermining existing pension savings or savings in to Personal Accounts. The Bill should be amended to include a clause reviewing the limit every three years.


25. The Government stated that there would be no transfers in or out of Personal Accounts and that this policy would be reviewed in 2017. This was to help ensure that the Personal Accounts scheme remained focused on serving the needs of its target market and to minimise administrative costs associated with transfer. It was recognised that there may need to be some very limited exemptions to this policy, including on the transfer of pre-vesting funds (many schemes require scheme members to be in pensionable service for a period of time before their pensions are vested, this period of time is known as pre-vesting). However, we feel that excluding a clause on transfers creates uncertainly for both existing schemes and individuals.


26. This should be rectified and a clause inserted signalling that transfers will be prohibited until a review is undertaken in 2017.


Compliance regime - the Pensions Regulator

What the Bill does

27. The Pensions Regulator is given a new statutory objective to maximise compliance with the new duties being placed on employers under Part 1 of the Pensions Bill 2007. The additional duty on TPR will result in a significant increase in workload for TPR and the development of a significant new infrastructure. However, the Bill does not include any detail on how this new role and, in particular, the set-up costs will be funded. Whilst in the longer term it is clear that the cost of regulation and enforcement will be met from the levy paid to TPR by the Personal Account scheme, we are concerned that no reference has been made to the additional funding required during the set-up phase. It would be unfair and inappropriate to expect these additional costs to be met through a higher levy from existing levy payers, the vast majority of whom will face large additional costs from 2012. (see para 5)


NAPF recommendation

28. The Bill should be amended to make it explicit that costs incurred in connection with set-up costs of implementing the new compliance regime should not be met by existing levy payers but rather from general taxation.


Consultation of members and employers


29. The Bill states that there will be a panel of persons to represent members and a panel of persons to represent employers (clause 52, subsection (4)). Under this clause it states that the functions of the members' panel may include nominating individuals to be members of the trustee corporation. The NAPF believes this function should also apply to the employers' panel.


Automatic enrolment and means-testing


30. One of the outstanding issues that needs addressing before Personal Accounts are launched in 2012 is the impact of automatic enrolment on means tested benefits for those who end up with small amounts of pensions savings. Although individuals will have the right to opt-out, it is hoped that many individuals will remain automatically enrolled. However, there is concern that for some individuals Personal Accounts might not be suitable as it might affect their entitlement to means-tested benefits in retirement. We believe a solution should be found to ensure that it pays to save for everyone.


NAPF Recommendation

31. The NAPF believes that without addressing the means-testing issue and its interaction with automatic enrolment, the Government could undermine the whole reform process. As supporters of the reforms, we believe a solution should be found that ensures that automatic enrolment works for everybody.


32. There are a number of options currently being explored. These include:


introducing a pensions disregard, whereby the first 12 of pensions income would be disregarded for the purposes of calculating entitlement to means tested benefits; and

changing the rules on trivial commutation to increase the amount that can be trivially commuted and increase the limit on capital disregard for means-tested benefits, trivial commutation allows people with small pension funds (limited to those below 15,000 in 2006/7) to take their entire pension saving as a lump sum, without having to buy an annuity.


33. The Government should investigate and cost these options with a view to finding a solution by 2012.


Simplifying the existing pensions landscape: lightening the load


34. Alongside the proposals to introduce minimum employer contributions, automatic enrolment and Personal Accounts, the Government is proposing to introduce measures aimed at pealing back layers of regulation. In particular, the NAPF supports measures to reduce the ceiling on the revaluation of deferred pensions from 5% to 2.5% for future service. A recent survey of NAPF members with open defined benefit schemes revealed that a priority for them was deregulation with over half of those surveyed calling for deregulation. The OECD has conducted a recent study of 16 countries providing DB pensions, which showed that the UK is only one of only two out of the sixteen studied to have mandatory requirements for both revaluation of deferred pensions and indexation of pensions in payment.


35. We are, however, disappointed that the Bill does not go further and include any clauses introducing a limited statutory override to allow schemes to amend their rules in line with the latest changes in legislation.


Revaluation of deferred pensions

What the Bill does

36. The cap on the revaluation of deferred pensions will be reduced for future accruals, from a date to be established, from 5% to 2.5%. The amended revaluation cap willl not apply to revaluation periods ending before the clause becomes operational.


NAPF Recommendation

37. The NAPF supports Part 2, clause 79 on the revaluation of accrued benefits and encourage full support of this clause. One reason why we believe this reform is important is that it allows DB schemes to share the increasing costs between current and deferred members. Our calculations show that reducing the increases in deferment to a 2.5% ceiling could reduce a scheme's liabilities by around 5-10%. Offering some reduction to the current burden on employers providing DB schemes.


38. We believe this change helps restore some balance between member protection and encouraging continued employer provision. In our survey of open DB schemes, a number of respondents indicated areas where deregulation would be most helpful. Reducing the LPI ceiling on revaluation scored highly. In addition employers wanted to demonstrate a commitment to their existing workforce by offering high quality pensions, this is being undermined, in some cases, by the increasing costs associated with deferred members.


Simplifying the pensions landscape - Statutory Override


39. The Bill should go further and introduce a limited statutory override, the Government has said that the override will be introduced through appropriate regulations in due course. However, we would like to see this introduced on the face of the Bill to reassure DB schemes that the Government are committed to simplifying the pension landscape. This would allow schemes to change their rules to take advantage of regulatory reforms that have already been introduced and would apply to future pension accruals only. The NAPF has signalled to Government the importance of demonstrating a genuine commitment to high quality occupational workplace pension schemes. Many of those schemes will be looking to this Bill for an indication of that support. We believe that a clause should be inserted that introduces a limited statutory override.


Simplifying the pensions landscape - Conditional indexation for pensions in payment


40. The Government decided not to recommend any changes to regulations on the indexation of pensions in payment. The NAPF believe the Government should have considered more closely the option to introduce conditional indexation. The NAPF believes that scheme sponsors should have flexibility to design their benefits, particularly in relation to indexation. As highlighted in the NAPF response to the Pensions White Paper (September 2006), unlike DC schemes, DB schemes are required to provide LPI at the lower of price inflation or 2.5% for each year the pension is in payment. This adds significantly to scheme sponsors' costs (and therefore risks). The NAPF believes the Government should go further so that, for future accruals only, conditional indexation is granted depending on the current funding position of the scheme.


January 2008