Compulsory Pensions? - Well Nearly

In under four years' time, the Government's latest pensions initiative will be launched upon the nation.

Previous attempts to promote retirement savinghave focussed on tax incentives and, most recently with Stakeholder schemes, running costs. But for all these efforts, private sector employees continue to make inadequate provision for pensions - exacerbated by the demise of defined benefit schemes.

So April 2012 will see Personal Accounts introduced, and the big difference this time is that companies willbe required to enrol employees from the start. They will also be required to contribute 3% of "band earnings" (see table below).

A compulsory scheme then? Well, not quite. Employees can opt out, but companies must do nothing to encourage it. And that opt-out will need to be reaffirmed every three years thereafter.

Here's some of the detail announced so far:

• All companies will have to offer Personal Accounts, or a comparable alternative scheme
• All employees over 22 and under State pension age must be automatically enrolled in the scheme on joining the company
• Those aged 16-22 will have the right to "opt-in"
• Employees can choose to opt-out of a PA scheme
• No transfers into or out of PAs will be allowed

Personal Accounts contribution levels

* band earnings will be set by reference to the Primary Threshold and the Upper Earning Limit for National Insurance contributions - £5,435 and £40,040 for 2008/09

Incidentally, contribution levels are subject to amaximum of £3,600 (based on 2005 earnings levels and upratedwith earnings from that point).

The Government is keen that Personal Accounts complement existing employer pensions provision, rather than provide an alternative. It therefore intends to ensure that good existing schemes qualify for exemption from Personal Accounts operation. To achieve exemption, qualifying schemes will have to provide for at least the equivalent level of contribution. And those with significantly higher contribution levels will be allowed to operate a three-month waiting period for scheme entry.

Aspira's view

Much of the detail has yet to be revealed and many questions about the operation of Personal Accounts remain. Employers should certainly start to consider how the introduction of Personal Accounts will affect their business and whether their existing pensions offerings need modification.

But our greatest fear is that Personal Accounts dumbdown retirement planning. Professional advice will not be available to members, unless adviser fees can be found on top of the contributions. This will leave employees in a vacuum.

But why would advice be needed? Surely, as a State-sponsored scheme, it's going to be well-run and beyond reproach and risk? Here's a number of compelling reasons:

• Attitude to risk, asset allocation and investment choice

  • As a low cost scheme it's likely that the investment options will be severely limited. It may even end up as a one-size-fits-all solution, irrespective of people's individual attitude to risk.

• Contribution levels and retirement funding requirements

  • How much should you save?
  • When do you want to retire?
  • How has investment performance affected this?
  • What will I get back?

• What to do with accrued pensions benefits elsewhere

  • You can't combine your Personal Account with other pensions - so you'll be left juggling many contracts, trying to pull together all the information to help you understand whether your retirement plans are on target - and there'll be no-one there to help.

If your employees aren't getting one-to-one advice from a professional financial adviser, speak to Aspira. It's justtoo important for them to get wrong.

And don't forget to watch out for further updates from Aspira as 2012 approaches - understanding the detail is going to be vital.