16 May 2008

FT: Brussels boosts pension regime plans

A obstacle to the launch of new UK personal pension accounts has been removed by the Commission. Lawyers had feared that under EU consumer protection directives, automatic enrolment into contract-based group personal pensions would be illegal.

A big obstacle to the successful launch of new personal pension accounts in 2012 appears to have been removed by the European Commission, potentially generating billions of pounds a year of extra business for insurance-based pension providers.

 

Employers will be exempt from automatically enrolling employees into the new personal accounts if they provide a company pension that is at least as good and  automatically enrol their employees into it.

 

But lawyers had feared that under EU consumer protection directives, automatic enrolment into contract-based group personal pensions – by far the fastest growing area of workplace pension provision as final salary schemes continue to close – would be illegal.

 

After concerted lobbying, however, from virtually the entire range of British pension interests, Brussels has told the UK that, in its view, the directives do not apply to the planned scheme.

 

The move was described as “a massive step forward” for automatic enrolment by Mike O’Brien, pensions minister, who praised the Commission for being “extremely helpful” and opposition parties for backing the government’s application.

 

“This is a testament to the consensus we have managed to build around the Pension Commission reform package,” he said.

 

Legislation to allow automatic enrolment into group personal pensions will now be inserted into the Pensions Bill.

 

The government is treating the exchange of correspondence with the Commission as confidential. But Stephen Haddrill, director general of the Association of British Insurers, said his association had seen it and had it checked by lawyers, “and we are happy that this does the job”.

 

He added: “We are confident this will protect insurers and employers from legal action by an employee over automatic enrolment”.

 

Without that assurance, employers would have had to shut down existing group personal pensions and replace them with an alternative – increasing the risk that employers would trade in more generous schemes for the lower minimum contribution required to personal accounts.

 

Automatic enrolment exploits inertia, with people more likely to stay in a pension scheme than actively apply to join one.

 

Some 4.7m people do not take advantage of a workplace pension to which they are entitled, and the ABI acknowledged that the higher take-up rate that automatic enrolment is likely to bring could add billions of pounds to the £6.7bn a year currently saved in workplace pensions.

 

Neil Carberry, head of pensions for the CBI employers’ organisation, said it was delighted at the move. “This clears away a very big obstacle to the success of personal accounts. It also means employers will not have to engage in extensive changes to their existing pension schemes in order to comply with the Pensions Act.”

 

By Nicholas Timmins

© FT plc