Pension funds looking for a GPP trick

As the latest Pensions Bill moves from the Committee stage to the Report stage, and the reality of personal accounts becomes closer, the government and pensions industry have yet to find a solution to the issue of auto-enrolment into group personal pensions (GPPs).

The problem is the EU Distance Marketing Directive (DMD) prohibits employers from automatically enrolling employees into contract based schemes such as GPPs, but allows auto-enrolment into trust based schemes, including the proposed regime of personal accounts scheduled for 2012.

The government and the industry have been working for over a year on a solution, as it is widely recognised that excluding GPPs from the pensions landscape in 2012 would affect the more than three million employees in these schemes, not least because the average employer contribution is 6%, compared to the personal accounts minimum of 3%.

Opposition parties are both pushing for an EU solution, in the form of an amendment to the existing directive or an exemption, and the Department for Work and Pensions admits the government is “seeking clarification, or amendment, of these directives to permit automatic enrolment into GPPs”.

But, while Mike O’Brien, Minister for Pensions Reform, confirmed during the Committee stage of the Bill that recent discussions “are a little more optimistic than our earlier indications”, he points out the EU directive is not due for reconsideration until 2011 and the consultation and implementation stages “would probably take us beyond 2012”.

As a result, a DWP spokesperson confirms: “We are also examining short-term, practical solutions that would maintain good quality workplace arrangements without compromising our wider objective to increase pension participation.”

One option, favoured by the National Association of Pension Funds (NAPF), is to convert existing contract-based GPPs into master trust schemes, while the alternative appears to be a form of streamlined joining combined with a target take-up rate.

John Lawson, head of pensions policy at Standard Life, favours the ‘letter joining’ approach, where employees sign a letter when they start the job and then receive an information pack about the pension scheme which offers them 30 days to opt-out.

“It’s slightly like auto-enrolment, and I think it would result in decent take-up rates without having to establish a structure to monitor it. The take-up test has been suggested as 80% of employees. But how would you monitor it? There’s a risk it could just turn into a farce as employers and providers collude to ensure they meet the 80% target.”

As a result, Lawson suggests that if the government goes ahead with a take-up rate the Pensions Regulator should take over the monitoring of the system, using information from HM Revenue & Customs (HMRC) to tally against the figures TPR receives from pension schemes.

But, Alasdair Buchanan, group head of communications at Royal London, warns: "This is potentially the biggest issue left to deal with and there just doesn't seem to be a straightforward, easy answer, as all the solutions put forward have significant flaws. This could be very, very messy."

1 March 2008