Cicero Policy Briefer

Issue 26, July 2008

Tweaking personal accounts: how the Pensions Bill is still taking shape

By Stephanie Fraser

Deliberation of the Pensions Bill has been proceeding apace in the House of Lords this month, with thoughtful and lengthy discussions (regularly clocking in at over seven hours each) on the Government’s proposals to introduce personal accounts taking place.

What is becoming increasingly clear is that the final design and outlook of the scheme are far from settled. While the Government is making what it calls ‘tweaking’ amendments, with the implication that they are merely tidying up and smoothing over minor crinkles, substantial debates are still being held about the fundamentals, right down to the central targets for the scheme. For instance, there has been sustained debate around whether to remove the lower earnings threshold from the face of the bill.

The Pensions Bill as it currently stands will require automatic enrolment into a qualifying workplace scheme, such as personal accounts, for all workers between 22 and the state pension age earning more than £5,035 a year - the lower earnings threshold. Removing this threshold would allow much greater participation in the scheme from those least likely to have an occupational pension of their own: those with multiple jobs or on low pay.

There is broad support for this idea between the Conservatives and Liberal Democrats, and the Government recognises this as an issue about how people on low pay can be best supported and how the pension system might be made most relevant to them. However, the Government and several employer representative organisations (including the Federation of Small Businesses and EEF) have also indicated strong concerns about the additional costs and administrative burden which would result from the change. The Government have promised to look closer into the proposition while rejecting any actual changes in this issue in the bill at this stage.

However, while the Government’s representatives in the Lords are largely resisting changes to the Bill, Pensions Minister Mike O’Brien has announced proposals to amend it to prohibit employers from encouraging their workers to opt out of the scheme. Debates in the Commons stages of the Pensions Bill highlighted concern from both Government and Opposition members about the ways in which employers may seek to reduce their long-term costs by offering inducements - such as higher salaries or one-off bonuses – to opt out. At the time the Government was against criminalising this procedure, stating that it would be difficult to monitor effectively and would fall naturally into the remit of an employment tribunal. Subsequently, the decision has been made to harden its stance on this, with the Pensions Regulator to be made responsible for enforcement.

This signals a pessimistic approach to personal accounts. Although both of these issues effectively come down to how to improve access to the scheme, the Government is clearly more concerned about the potential prevalence of what are regularly termed “unscrupulous employers” than about extending the reach of the scheme to people who are most genuinely in need of a secure retirement. The possibility for employers to offer incentives to opt out is a clear threat, but the Government’s confidence in the scheme is somewhat undermined by effectively placing protection measures ahead of inclusion measures.

Stephanie Fraser can be contacted on +44 (0)20 7665 9531 or click here to email.