Memorandum submitted by Legal & General (PE 14)
Summary
¨ Personal Accounts
Must Complement, Not Replace Existing Provision, achieved by these specific
controls :
ª No transfers of
existing pension rights into Personal Accounts
ª Annual
Contribution Cap of £3,600
ª No lump sum
contributions as these are catered for by existing market
¨ Thus keeping Personal
Accounts closely focussed on the people that need them, the ones that existing
workplace pensions have failed to reach
¨ And ensuring that the
taxpayer subsidy of Personal Accounts is restricted to subsiding new saving,
and not used to subsidise a replacement of pension plans that are already
commercially available
¨ Group Personal
Pensions and other contract based schemes are an important part of workplace
pension provision, with over 100,000 employers using this route to fund
employees' retirement, typically at twice the generosity proposed for Personal
Accounts
¨ Contract based
schemes cannot use automatic enrolment until an amendment is secured to the
European Distance Marketing Directive. As this cannot be promised quickly,
these schemes need to be exempted from Personal Accounts without using
automatic enrolment in the meantime.
¨ Taken as a whole,
exemption for contract based schemes should be conditional on obtaining a
higher rate of employee take up than Personal Accounts. This is workable as :
ª The employers
who sponsor contract based schemes are serious about pension provision
ª The life
assurers that provide them have a range of tools that help achieve good take up,
and innovative competition continues to improve these tools
ª By applying the
threshold test to contract based schemes as a whole rather than to individual
employers avoids the statistical problem of small samples
ª The life
assurers should lose their accreditation if their portfolio misses the
threshold. This will ensure that they restrict the sale of these plans to
employers that are genuinely serious, and that they exclude any employers
looking for a cheap way to avoid automatic enrolment
¨ Means testing is an
issue that still needs to be resolved for Personal Accounts.
¨ A cost effective
solution would be to flex the existing capital disregard for means testing, so
that it could be taken by claimants as either a capital disregard, or an income
disregard, but not both.
Background
Legal & General is
a leading UK pension provider and investment manager. We provide pension
services to over 2,800 UK firms managing assets of over £230bn. Legal &
General has a particular strength in managing pension schemes for small and
medium sized companies.
Personal Accounts
should complement, not replace, existing provision
Legal & General
supports the widest possible provision of workplace pensions. We recognise that
not all employees are currently covered by workplace pension schemes. And it is
sometimes not economic for life assurance companies to offer personal pensions
to individuals who are only able to make small or intermittent contributions.
Personal Accounts may be an effective way of offering workplace pensions to employees
in this group.
However, it is
important that Personal Accounts complement rather than replace good existing
workplace pension provision. This will help to ensure that the UK's existing
workplace pensions - which are the best in Europe - continue to thrive and are
not eroded by employers "levelling down" to Personal Accounts.
Three measures have
been proposed by Ministers during the consultation process, and whilst the Bill
contains the provision for secondary legislation to introduce these, we believe
that each are so important that they should be enshrined in the primary
legislation:
No transfers of
existing pensions into Personal Accounts
One of the clearest signals that Personal Accounts are to complement,
not replace, existing provision is the proposed ban on transferring existing
pension benefits into Personal Accounts. The Personal Accounts Delivery
Authority and the Trustee Corporation that will follow it should be focussing
their attention on those individuals that workplace pensions have failed to
reach, and should not be distracted from this endeavour by accepting transfers
of existing pension entitlements into Personal Accounts.
Annual
Contribution Cap of £3,600
After extensive consultation, Ministers arrived at an annual contribution
cap of £3,600 for Personal Accounts, as an appropriate balance between
providing some headroom for members of Personal Accounts to make contributions
higher than the minimum 8% whilst protecting the existing pensions industry
that provides ample opportunity for individuals wishing to make larger pension
contributions. Again, we see this an important signal, focussing Personal
Accounts on their intended target market. It should therefore be included in
the primary legislation
Lump sum
contributions
The impact assessment notes that a decision has yet to be taken on a
higher contribution limit in the first year, or subsequently for those wishing
to contribute lump sums to catch up on earlier missed contributions.
Both of these ideas run counter to the rationale of Personal Accounts,
which were originally proposed by the Pensions Commission to fill a gap in
existing market based provision. There is no shortage of opportunities in the
High Street for individuals to make lump sum retirement savings, either inside
or outside a pension scheme. And unlike Personal Accounts, the existing market
based solutions available to people come with the benefit of financial advice
and the protection that FSA regulation offers to individual consumers.
We believe that the Bill should both specify the annual cap of £3,600
and exclude additional contributions beyond this.
We understand that
Personal Accounts will provide a valuable social function in bringing many
millions of people into pension saving for the first time. To achieve this is
clearly going to involve a degree of taxpayer subsidy in terms of the operating
costs - the Personal Accounts Delivery Authority is already spending taxpayers'
money on both its staff salaries and the fees of its consultants and advisers,
whilst we note that the Bill provides the Secretary of State extensive powers
to give financial assistance to the Delivery Authority and the Trustee
Corporation.
This subsidy
underlines the need to ensure that Personal Accounts complement, not replace,
existing provision. Whilst Parliament may find good social grounds to spend
taxpayers' money subsiding the extension of pension coverage, such subsidies
should be kept to a minimum and it would be profligate to subsidise that which
can be provided commercially by the existing market, which is what would be
happening if Personal Accounts encroaches on existing pension provision.
Group Personal
Pensions and Automatic Enrolment
Currently almost 70%
of UK pension schemes and almost 40% of scheme members are in contract based,
as opposed to trust based, schemes. These comprise Group Personal Pension
Schemes and Group Stakeholder Pension Schemes. These schemes have enabled
employers to introduce simple workplace pension provision, allowing employees
to benefit from the low charges that were ushered in by Stakeholder Pensions,
without exposing employers to the risks and complications of a traditional
trust based scheme. In a contract based scheme, the employers' commitment is
clearly defined by contract and they derive much comfort from this.
After careful
deliberation, lawyers on all sides have concluded that contract based schemes
are included in the EU Distance Marketing Directive which prevents the
application of automatic enrolment to such schemes.
We support the
Government's commitment to raise this issue in Brussels, and believe that the
long term goal should be for the UK to secure an exemption of these
arrangements from the EU DMD, which then allow automatic enrolment. But this
process can be neither quick nor certain of delivery - there are few if any
parallels elsewhere in Europe that would enable the UK to garner allies to
support and speed up the delivery of a change to EU law.
Therefore we believe
it is vital that Government should confirm at the earliest opportunity both
that contract based schemes will be exempt from Personal Accounts even without
automatic enrolment, and the detailed framework for this exemption. Clause 3
provides the Secretary of State with these powers, and we believe he should publish
the draft regulations at the first opportunity.
This issue is vitally
important, both to preserve the provision of over 100,000 contract based
schemes that already exist, and to maintain this avenue for future employers
seeking to provide contract based pension schemes that are simple to operate
whilst providing benefits that are typically twice as generous as those offered
by Personal Accounts.
In our experience, the
employers that sponsor contract based schemes are serious about pension
provision and are keen to see a high level of employee take up. It is a
competitive feature of this market that the life assurers that provide these
schemes offer employers a range of tools to assist with employee take up.
It would be entirely
consistent therefore for the exemption for contract based schemes to be
dependent upon these schemes, measured at a collective level, to achieve a
higher take up rate than Personal Accounts does with automatic enrolment. This
could not be measured at individual scheme level as many of the employers are
small and their schemes are not statistically significant, but it could be
measured at the level of each life assurer.
The requirement that
each life assurer must meet the threshold for their whole portfolio - or lose
their accreditation as an exempt scheme provider - would ensure that life
assurers continue to sell contract based schemes to employers who are serious
about pension provision, and avoid any free loaders or draft dodgers who are
seeking a cheap alternative to automatic enrolment.
There has been much
mis-guided discussion around "Master Trusts", suggesting that this is a route
through which contract based schemes such as Group Personal Pensions could
circumvent the EU rules and operate automatic enrolment. Legal & General
have operated two such Master Trusts since the 1980s, so we feel well placed to
comment.
In terms of automatic
enrolment, the reasoning is sound - Master Trusts are Occupational Pension
schemes, not contract based schemes, and so can operate automatic enrolment.
But in terms of
whether they fit the needs of these employers, the situation is quite the
reverse. They are trust based schemes, run and governed by trustees, which
brings the hassle and uncertainty that small employers seek to avoid. Occupational
schemes are fine for large employers who can afford to hire professional
advisers, but these are seen as an un-palatable burden by small employers.
In fact, our
experience has been that small employers see Master Trusts as a worst of both
worlds situation. Not only have they strayed from the clarity of a contract
based arrangement into the grey areas of trustee discretion, but by joining a
Master Trust along with other small employers they fear the possibility of
contagion and picking up other employers' liabilities should the wheels come
off. Whilst the possibility of contagion is more fear than reality, the fact is
that the vast majority of small employers that joined our Master Trusts have
since left for other arrangements.
To prevent extensive levelling
down amongst the small to medium employers that use contract based schemes, we
believe it is essential that Government confirms at the earliest opportunity
that these schemes will be exempt without automatic enrolment until such time
as the EU law can be changed.
Avoiding the Means
Testing Trap
Much more than pension
schemes before, Personal Accounts are in danger of providing very poor value to
those on means testing.
This arises from the
relatively low level of employer contribution. In the 1970's and 1980's,
workplace pensions in the UK typically saw the employer paying twice as much as
employees. More recent schemes, from the 1990's through to today, typically see
a 1:1 ratio of employer to employee contribution.
After much careful
deliberation as to what employers could afford, the Pensions Commission
concluded that a ratio of 3:5 against the employee was the appropriate level
for Personal Accounts.
The corollary of this
is that with such a modest level of employer contribution, there is real danger
that employees caught in the means testing trap could get a very poor return on
their own personal contributions.
Whilst it might seem
acceptable for the benefit of employer contributions to be eroded by the
withdrawal of means tested benefits, it is causing much public angst that
individual's own contributions could be affected in this way.
We realise that there
are no easy solutions to the means testing trap, but the problem must be
addressed if the launch of Personal Accounts is to gain the widespread public
support that will be so vital to its success.
Two ideas have been
advanced by the Pensions Policy Institute in research papers published last
year, and whilst they have some merit we do not find them convincing :
Increasing the trivial commutation limit would enable small savers to escape the loss of
means tested benefits by cashing in their pension at retirement. But this would
surely only serve to tempt those most in need of additional pension income to
blow their Personal Accounts savings in one go.
Introducing a Pension Income Disregard would certainly provide some welcome relief for
those with small pensions, but at a cost to Government estimated as £0.6
billion by PPI. There would be many "un-deserving" cases within this additional
cost
Legal & General
suggest that a better solution would be to flex the existing system of savings
disregards that already apply to means tested benefits. Currently, applicants
for Pension Credit, Housing Benefit and Council Tax Benefit are allowed to disregard
the first £6,000 of their savings and capital assets. Legal & General
propose that applicants for means tested benefits should be able to flex this
disregard against either savings or pension. This could be achieved by the
simple calculation of capitalising the value of the pension. We suggest that a
multiplier of 10 would be appropriate, which allows for the advanced age of
many Pensions Credit claimants.
Under such a system,
an applicant for the main means tested benefits of Pension Credit, Housing
Benefit and Council Tax Benefit would add ten times their annual pension to
their total savings, and their means tested benefits would be un-reduced if the
sum of the two is less than £6,000.
The most vulnerable
members of Personal Accounts, those on low incomes, with broken employment
records and low levels of other savings would thus be lifted out of the means
testing trap. But by combining the one £6,000 disregard to cover both pension
income and savings, the cost to the Exchequer is much less than if claimants
were allowed to disregard both the current £6,000 savings disregard and a
further pension disregard.
Conclusion
Legal & General
support the Government's plans for Pensions Accounts and encourage Members of
both Houses to speed the passage of the Bill.
But we particularly
recommend that the Bill should be amended so as to :
Focus Personal Accounts on their target audience, through a ban on
transfers of existing pension entitlements into Personal Accounts, through an
annual contribution cap of £3,600 and without any provision for additional lump
sum contributions
Confirm at the earliest opportunity that Group Personal Pensions and
other contract based workplace pension schemes, which are a valuable part of
the pension scene offering benefits typically twice that of Personal Accounts,
will be exempted from the Personal Accounts system without the requirement for
automatic enrolment, until such time as an amendment to the EU Distance
Marketing Directive can be secured
Allow for the capitalised value of small pensions to be treated as
falling within the £6,000 capital disregard for small savers applying for means
tested benefits.
January 2008