Two announcements this week concern matters which may eventually have a significant impact on UK occupational pension schemes.

Personal Accounts

Yesterday the Government published its responses to the consultation on the personal accounts White Paper, Personal Accounts: A new way to save and the Work and Pensions Select Committee report on the White Paper. Two new research reports, Live Now, Save Later: Young people, savings and pensions and Attitudes to Pensions 2006 have also been published and are available as pdf downloads from the same web page.

The Attitudes to Pensions research report showed that 84% of people surveyed supported the idea of a national pension savings scheme such as personal accounts, and 68% supported automatic enrolment – particularly if there was an employer contribution. However, a third had never contributed to a private pension, most of them prioritising spending today over saving for tomorrow, although one in four of the people surveyed said they knew little or nothing about pensions anyway.

The key decisions announced this week have already been widely publicised by the national press as well as within the pensions arena. Personal Accounts are to be run as an occupational pensions scheme managed by a board of trustees - always assuming enough super-altruistic individuals step forward for this singularly onerous responsibility (one hopes they will be properly insured or otherwise protected). Trustees are to be advised by a members' panel and an employers' panel.

The second key announcement is that there is to be a cap on contributions: an annual limit of £3,600 (in 2005 earnings terms), uprated by earnings year on year - with a possible first-year-only limit of £10,000. Individuals will be expected to contribute 4% of earnings between about £5,000 and £33,500 pa, plus 25% tax relief, and employers 3%. This plan will be phased in over three years.

Although the £3,600 limit has been set at the low end of expectations to reduce the damage to existing provision, it is probably true to say that current contributions by and on behalf of the great majority of money purchase scheme members (especially moderate to low earners) do not exceed this limit. The lower charges associated with Personal Accounts are bound to create significant movement of funds in their direction, notwithstanding Pensions reform minister James Purnell’s statement that

"It is important that personal accounts complements rather than competes with existing high quality pension provision."

Employers sponsoring existing occupational pension schemes which require contributions of 8% or more (with a minimum 3% employer contribution) on band earnings for each individual will be exempt from Personal Accounts.

A third key feature of Personal Accounts is automatic enrolment (with an opt-out facility) - a large body of research shows this is the only way to be sure of substantial take-up. However there remains a serious difficulty where existing workplace pension provision takes the form of group personal pensions. The EU Distance Marketing Directive prevents automatic enrolment unless each individual has consented. The Government recognises the problem and is trying to find a solution, where the GPP captures contributions of at least the same 8% level of band earnings.

Cross-border activities & the IORP Directive

Apparently at the other end of the scale of relevance, The Pensions Regulator (TPR) this week published updated guidance on cross-border activities. This covers the potential inclusion later this year of three EEA member states (Norway, Liechtenstein and Iceland) to the IORP requirements. When the UK legislation is updated to reflect the inclusion of these EEA member states, the regulator's guidance will be updated again to reflect this.

The amendments also allow for the possibility of the regulator accepting applications for authorisation and approval for schemes currently accepting contributions in respect of European members, as well as applications from both new and existing schemes accepting contributions from European members for the first time. Material relating to the original deadlines for application has been removed.

For further background to the issues, see our earlier articles of 3 March 2006 and 29 March 2006. UK-based schemes would be expected to strive to avoid having to apply for authorisation to operate cross-border as it would trigger a requirement for full funding. Certainly in January 2007, a CEIOPS* report noted that while twenty-three UK-based schemes were already operating on a cross-border basis prior to the IORP Directive's implementation (ten of them only in Ireland), only two have commenced operating on a cross-border basis since the IORP Directive's transposition date (i.e. 23 September 2005).

* Committee of European Insurance and Occupational Pensions Supervisors