Pension reforms to cut costs for employers

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http://www.ft.com/cms/s/0/0a98a182-ab90 ... 07658.html

By Norma Cohen

Published: November 6 2008 02:23 | Last updated: November 6 2008 02:23

Changes to the pensions bill, aimed at trimming costs for employers and introducing flexibility into the way company contributions are made to the new private retirement accounts, are being planned by the government.

Rosie Winterton, the new pensions minister, is on Thursday expected to set out the broad outlines of an agreement enabling employers who contribute more than the statutory minimum to pension savings to keep on doing so, while allowing room for manoeuvre in the administration of savings accounts for those that do not.

She is also expected to announce that the general levy on pension schemes and the Pension Protection Fund annual levy for 2009-10 will be frozen at this year’s level.

The general levy supports the administrative costs of the pensions regulator while the PPF levy meets the costs of running the insurance safety net for the underfunded schemes of insolvent employers.

Sharp falls in equities prices have weakened pension schemes while the deteriorating economy has left cash-strapped employers to plead for some leniency on the costs of managing schemes.

However, the issue of how personal pension accounts are to be administered has been a subject of lengthy discussion between the National Association of Pension Funds, the Association of British Insurers and government.

The pensions bill will create a requirement for employers automatically to enrol all workers in a personal pension scheme and contribute 3 per cent of “qualifying earnings” on their behalf unless the employee opts out.

The government has defined “qualifying earnings as basic pay, overtime bonus and commission within a given year”, and of between £5,035 ($7,972) and £33,540 annually. However, employers pointed out that for the lowest paid, the new rules would result in smaller employer contributions to pension savings than were made currently.

They also objected to the definition of qualifying earnings, warning that it could lead to required contributions on erratically earned pay resulting in higher contributions than is now the case. Employers argued that in most cases, existing contributions already exceeded this threshold – even if most scheme rules excluded overtime and bonus pay from calculations.

Ms Winterton will announce a “self-certification” procedure for employers who are confident that their own existing scheme rules will make contributions that are at least equal to those that would be required under the pensions bill. That will make it unnecessary for companies to make expensive changes to their systems.

Copyright The Financial Times Limited 2008