Memorandum from the Association of British Insurers (ABI) (PE 11)
1. The Association of British Insurers (ABI) represents the collective interests of the UK's insurance industry. The ABI speaks out on issues of common interest, helps to inform and participate in debates on public policy issues, and also acts as an advocate for high standards of customer service in the insurance industry.
2. We support the Government's aim to encourage more people to save for retirement through a work-based pension scheme, into which employers also contribute. However, as currently drafted, the Bill creates a strong risk that employers currently offering pension schemes to their employees will abandon those schemes and switch to Personal Accounts with a lower employer contribution. This would damage existing workplace pension saving and amendments to the Bill are needed to minimise this risk.
3. The current Pensions Bill provides many broad, overarching powers for the Secretary of State, with much of the detail consigned to regulation. We believe more of the detail promised by Ministers should be committed to the face of the Bill, and less through regulation. Where regulation is essential, this should be introduced via affirmative resolution in order to ensure proper Parliamentary scrutiny.
4. We are especially concerned by four issues which must be resolved if good private provision is not to be undermined by these reforms:
· Measures to maintain and encourage existing schemes
· Steps to better target eligible Personal Accounts savers
· Costs of Personal Accounts and potential taxpayer subsidies
· Definitions for qualifying earnings in relation to exempt schemes
Measures to maintain and encourage existing schemes
5. It is vital that good workplace pension schemes can be qualifying schemes under the provisions of the Bill without imposing undue burdens on employers and providers. Clause 3(5) of the Bill sets out a broad provision that could be used to exempt contract-based workplace pensions (such as Group Personal Pensions (GPPs)) from the auto-enrolment requirement, providing a solution to the prohibitions in the EU Directives on Distance Marketing and Unfair Commercial Practices.
6. However, Ministers have yet to provide certainty regarding an auto-enrolment exemption for these schemes. Their future therefore remains very uncertain, which is damaging to both employers and providers. GPPs account for almost 70% of UK pension schemes (118,000 out of 176,000) and almost 40% of scheme members (2.6m out of 7.0m). Employers contribute on average 6% for employees in these schemes, twice that of the Personal Accounts standard. This market represents annual pension savings of around £900m.
7. It is vital that Ministers provide employers, employees and providers with the certainty they urgently need regarding the future of GPPs. We believe that the answer is to allow employers to use streamlined joining techniques - such as shortened application forms, face-to-face sessions and point of employment I contract joining (where employees agree in their contract to be enrolled in the pension scheme) - to enrol as many employees as possible into their existing schemes. These methods are already used and can achieve high participation rates,
8. Timing is also important to the reforms delivering their intended objectives. Providers and employers need certainty about the terms of any exemption, to enable them to make key decisions now that are necessary for businesses to plan ahead. The precise terms and timing of any auto-enrolment exemption for GPPs must be clarified at the earliest possible stage.
Clause 3(5) provides a broad provision to potentially carve out work place pensions from automatic enrolment. It is imperative that the Bill identifies, and legislates for, an appropriate exemption for GPPs.
Steps to better target eligible Personal Accounts savers
9. The Bill does not provide a ban on transfers between Personal Accounts and other pensions, despite the fact this has been explicitly promised by the Government. Nor does the Bill provide for an annual contributions cap, instead leaving the Secretary of State the option to introduce - and amend -contribution limits through regulations.
10. The Government's own research (MORI), published in the impact assessment with the Bill, shows there is little demand for such a provision. Only 3% of the working population would ever be likely to exceed a £3,600 annual contributions limit. In addition, Government intervention in the market on this basis would be entirely unjustified - addressing neither a market failure nor a behavioural failure, The existing savings market already provides ample means of making lump sum savings.
11. Existing savings products are subject to rules on regulated financial advice, but encouraging lump sum savings into Personal Accounts would take such savings out of the scope of regulated advice, Lump sum contributions would not benefit from employer contributions and, as such, Personal Accounts may well not be the best place to invest them, especially as their savings will be tied up until retirement. Consumers might be better advised to clear debt or invest elsewhere. Allowing lump sum contributions would create the danger of inappropriate investment in Personal Accounts.
12. As drafted, the Bill's failure to safeguard existing good pension schemes also represents a distraction from Personal Accounts' core function and target market. Introducing complex additional features such a lump sum contribution facilities to Personal Accounts would greatly increase the operational and behavioural risks. Achieving the Government's objective of improving pensions savings for several million employees via Personal Accounts will be challenging enough. The reforms should concentrate on getting the basics right to ensure that the core policy objectives are achieved.
In its present state and given these important omissions, the Bill runs counter to commitments given by Ministers and provides excessively broad flexilibility regarding the scope and nature of the reforms. If Personal Accounts are to be targeted effectively and complement, rather than have a negative impact on good GPP schemes, commitments on transfers and an annual limit must be provided for on the face of the Bill.
We also note that the Bill (clause 53(3)) allows the Secretary of State to make regulations to enable contributions in excess of an annual limit. We urge the removal of provisions allowing for additional lump sum contributions into the scheme over and above an annual contributions cap.
Costs and potential taxpayer subsidies
13. All set-up, administration and promotion costs for Personal Accounts must be properly accounted for and recovered through charges to Personal Account holders, as is the case in the current pensions market. However, we remain concerned that, as drafted, the reforms will lead to taxpayer subsides that will distort and undermine current pension provision.
14. The Government has stated that Personal Accounts should not receive state support where to do so would give it an unfair commercial advantage over other pension providers. However, the bill (clause 64 (3) and Part 3) grants the Secretary of State excessively broad powers to give financial assistance to the Delivery Authority and the Trustee Corporation, including interest-free loans. Such assistance would constitute state aid and would provide Personal Accounts with an unfair advantage over alternative workplace pensions, rather than being complementary, thereby encouraging employers to abandon existing good pension schemes.
15, It has already been disclosed that the Government has given £21 million in state aid to the Personal Accounts Delivery Authority. According to the Government's own guidance on state aid, the European Commission (EC) should have approved this grant before it was given to PADA. However, the Government has provided no information about whether the EC has cleared this payment as legal state aid.
The Bill should provide legal certainty of a level playing field by placing a requirement on PADA and the Trustee Corporation to borrow at commercial rates and to recoup all costs through charges to members over a number of years.
The Bill should also place a requirement on the Government to provide transparency about all financial assistance given to PADA and the Trustee Corporation, and whether each payment has been cleared by the EC as legal state aid.
Definitions for qualifying earnings in relation to exempt schemes
16. We have additional concerns around the qualifying earnings provisions, and how they are currently defined in relation to exempt schemes, The Bill's definition of qualifying earnings (Part 1, Chapter 1, Section 11) includes overtime, bonuses, commission, statutory sick pay, statutory maternity and paternity pay and statutory adoption pay. Qualifying earnings are also based on the band of earnings between £5,035 and £33,540. However, most existing pension schemes base contributions on full earnings (rather than earnings over £5,035) and on basic pay only,
17. Unlike employers, providers do not hold this level of detail on scheme members' earnings. If employers are forced to introduce complex processes for defining contributions into exempt GPP schemes, this significantly increases the likelihood of the employer closing good private schemes in favour of the default Personal Accounts option.
18. We appreciate that the Government has drafted the earnings definition widely to prevent employer avoidance. However, the requirement to base contribution rates on a total basic pay basis would make any GPP exemption test almost impossible to comply with, We also understand that some unions and employers are also concerned by the current plans, and are considering appropriate solutions.
A clear and practical solution is needed to address this problem. We would welcome discussions with DWP and other stakeholders to address these difficulties and identify a suitable solution.
Other concerns arising from the Bill
19. Despite assurances to the contrary PADA's objectives are too generic, as currently stated. We believe a specific objective should be added, to state that the introduction and operation of Personal Accounts must not damage good private pension provision through GPPs.
The Bill should include provisions for PADA, to the effect that the introduction and operation of Personal Accounts must not damage good pension provision through GPPs.
20. To illustrate the reasons behind the ABI's broader concerns on the Bill, there are 100,000 GPPs which have an average employer contribution of 6 per cent - twice that proposed for Personal Accounts. If employers convert to Personal Accounts because they do not wish to run more than one scheme, due to the lack of workable exemptions for GPPs, there is a high risk of levelling down to the Personal Accounts minimum contribution level. We do not believe the Government wishes the Bill to have such an unevaluated consequence, and believe this provides firm grounds for an exemption for GPPs.