Personal Accounts - the Labour Party’s Answer to a “demographic Time – Bomb”

It is recognised throughout the western world that as a result of a reducing birth rate and increased longevity in the medium and long term the State cannot afford to continue to fund state pension benefits for the elderly. This scenario has challenged many governments in the past. It is now considered by the current Administration that the only way to deal with this problem is to encourage individuals to take personal responsibility for making some provision for their future retirement income funding needs.

Following the disappointing take up of Stakeholder Pensions, Personal Accounts are the government’s solution to this problem. They will take the form of a national pension scheme which is due to be launched in April 2012. It will act as a top up facility to supplement state pension benefits and any pension benefits an employee has accrued during their working life. Importantly, Personal Accounts will not apply to the self employed.

The Pensions Bill currently progressing through Parliament will result in new legislation to introduce Personal Accounts. It has passed through the House of Commons and is due to be debated in the House of Lords shortly.

The Government wants Personal Accounts to be self sufficient with policy charges levied to fund the costs of running the accounts. Account charges will be very low and it is anticipated that individuals will not require advice, instead seek information from the internet and advise themselves.

Personal Accounts are targeted at employees who are not members of a company scheme and will attempt to force many workers and their employers to make pension contributions for the first time.

With effect from 2012, when it is anticipated that Personal Accounts will be launched, employers will have to automatically enrol all staff into a Personal Account unless it can be proved that a company’s existing pension scheme is at least as good as a Personal Account. Employees who do not want a Personal Account will be able to opt out. It is understood that employees who do so will have to be invited to opt in again on an annual basis.

It is anticipated that contributions to Personal Accounts will be based on the following earnings* percentages:

Employee           4% of earnings
Government        1% employee income tax relief
Employer            3% of employees’ earnings

*The percentages above will be applied to any earnings of more than £5,000 and less than £35,000

Whilst it is anticipated that these contribution levels will be phased in over a number of years they will still result in employees seeing a reduction in their net take home pay and an increase in the size of their employers’ payroll.

As far as advice relating the Personal Accounts is concerned, it is not clear who will pay for this.

There is real concern that one effect of the introduction of Personal accounts will be to reduce means-tested benefits. Discussion is taking place regarding this sensitive area. This may be a very good reason for the low paid to opt out as it may not be in their best interests to have a Personal Account.

Further detail relating to Personal Accounts will be published in the autumn when the Pensions Bill receives Royal Assent. Legislative detail will be clarified shortly after that.

As far as action is concerned it is clearly difficult to make any decisions regarding Personal Accounts until greater detail of their operation is known. It is however important that employers are aware of the introduction of Personal Accounts so they may start to prepare for their introduction.