Personal Accounts - An introduction to new government pension reform

STEVE HOWARD, the Managing Director of Lighthouse GEB answers this important question and writes...

For most UK employers, even those who currently offer staff pensions, it is inevitable that this piece of legislation as  it stands will result in both disruption and greater costs, why?

· Typically staff related expenditure represents around 85% of the average UK employers cost base. Any increase in staff costs then will have a marked effect on profits.
· In our experience even employers with generous pension schemes (defined as 6% or more in employer contributions) do not achieve full take-up from all eligible employees. 
· The definition of eligible earnings for Personal Accounts is wider than most employers currently use. 
· Most companies’ eligibility criteria for existing schemes will currently exclude large sections of the workforce who will become immediately eligible to Personal Accounts.

Q - So what steps can I take to minimise the impact of Personal Accounts on my business?

There are strong reasons for you to act in advance of the arrival of Personal Accounts. Acting now, perhaps by using a mixture of both salary exchange and part of any future employee pay rises, could help you to manage out all the initial shock of the costs associated with the advent of Personal Accounts.

Furthermore, if you do nothing more than adopt Personal Accounts in 2012 your employees will rightly view this as being something you simply had to do and therefore see no benevolence in the act. The additional cost you will inevitably be incurring when Personal Accounts start will buy you nothing in terms of your employees’ perception of you.

Q - Will it be better to switch to Personal Accounts when they arrive or should we ensure our current scheme, or any new scheme we are considering, is exempted?

There are a number of reasons why we believe most quality employers will want to offer their staff an exempted scheme rather than adopt Personal Accounts;

- Personal Accounts won’t serve the needs of higher earning employees well as the maximum contribution is just £5,000 PA. Consequently, those employees eligible to total contributions in excess of this amount will require some form of “top-hat” scheme. This means having two arrangements rather than one, causing more administrative headaches for employers than would be needed under and exempt scheme which can accommodate the diverse needs of all employees.

- All earnings, not just basic salary, are taken into account. This will mean significant additional work for HR/Payroll departments who will need to recalculate contributions for those with variable pay each and every month/week. If you can demonstrate that an employee is no worse off in your own arrangement then you will be able to continue to manage contributions in a way that is less onerous, such as a single annual review of payment levels for example.

- It appears that exempt schemes will be able to operate a 3 month eligibility period; this could be beneficial to employers with high temporary seasonal work force variations.

- Personal Accounts will have a transfers moratorium – preventing employees from moving money in or out during the first 5 years. Employees generally want to rationalise their different pension “pots” into one account, this will still be possible with an exempt arrangement.

- Personal Accounts start at midnight on the 5th of April 2012 when some 10 million employees may need to be enrolled into a scheme all at once. While there may be some “phasing in”, the Government’s track record on large IT projects is patchy at best and many payroll providers may also struggle to cope. There is a serious risk of business disruption while this settles down.

- Exempt scheme are likely to offer very wide investment choices to employees. Personal Accounts in contrast will have very limited fund choice, and probably no ethical investment options; those employees who have previously taken more control over their investments may not want to lose these options.

Ultimately we believe exempt schemes will be adopted by those employers who want to drive value for money from their pensions spend, after all if you are only offering the legislative minimum required under Personal Accounts then you have no way of delineating your pension offering from other employers doing the same. A good quality exempted scheme need not cost the employer any more money, and indeed has the possibility of saving you money in that such a scheme may yield commissions enabling you to meet some or all of the cost of employing scheme advisors/administrators to deal with much of the member/employee communication work and support needed.

For all employers we believe it will pay dividends to engage with this issue now and develop strategies well in advance.

Steve Howard M.D. of Lighthouse GEB, Lighthouse Carrwood Ltd

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