Memorandum submitted by Legal & General (PE 14)





Personal Accounts Must Complement, Not Replace Existing Provision, achieved by these specific controls :

No transfers of existing pension rights into Personal Accounts

Annual Contribution Cap of 3,600

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 :

The employers who sponsor contract based schemes are serious about pension provision

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

By applying the threshold test to contract based schemes as a whole rather than to individual employers avoids the statistical problem of small samples

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.



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.







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