The weight of the responsibility

There is renewed focus on the Pensions Bill currently going through Parliament and it is worth reminding ourselves of the changes it will make to the pensions landscape and some of the issues we think need addressing to make sure it is workable in practice.

Much of the attention has been on the new personal accounts scheme, but the Bill's central thrust is about placing new responsibilities on employers. The legislation will have important implications for all companies - even those who are already making generous pension provision - so it is important that providers work with advisers to help employers understand their role and guide them through their options. Although some doubts have been raised about the timetable, all this is set to 'go live' from 2012 and it is important to think about the possible implications now and to prepare for the changes.

The Bill will require firms to enrol all 'jobholders' - a category which will include temporary staff as well as permanent employees - automatically into a pension, so long as they are earning above £5035 a year and are more than 22-years-old.

Jobholders will be able to opt out if they wish, but the Bill establishes a minimum contribution in respect of jobholders who stay in. For employers this will mean paying at least 3 per cent on a band of earnings between £5035 and £33,540 a year, with employees themselves contributing a further 5 per cent, including tax relief. The concept of 'band earnings' includes bonus, overtime and commission payments in addition to basic salary.

So while there has been much talk of 'soft compulsion' on individuals in order to encourage them to save, for employers the compulsion is rock hard: they will be compelled by law to act, with penalties for failing to do so ranging up to a £50,000 fine or two years in prison.

They will be confronted with a choice of vehicles for meeting their new obligations: they can use a private scheme, personal accounts or a combination of the two. That decision will have significant implications for their business.

Personal accounts are effectively the default option for employers who do not have a scheme in place and are not willing to set one up. Last year’s Pensions Act established the Personal Accounts Delivery Authority to oversee the design of what is a brand new trust-based occupational scheme on a potentially enormous scale. The new legislation will give the authority the powers it needs to build that scheme. The detail of personal accounts is still the subject of much discussion and much of it will be determined in regulations after the Bill itself has passed into law.

The government has made clear it wants charges for personal accounts to be as low as possible but it seems to have backed away from its earlier insistence on an annual management charge of 0.3 per cent. The consultation recently conducted by the Personal Account Delivery Authority on the structure of charges also found significant support, including from us at Aegon, for the use of a small up-front contribution charge. This would help with the financing of the scheme, especially in the early years, and would reduce the level of risk being borne by the taxpayer - which ought to be a significant consideration in the present financial climate.