date: 15 September 2008

embargo: For immediate release

Stand firm on qualifying earnings, TUC tells Ministers

The TUC has today (Monday) urged Pensions Minister Mike O'Brien to resist pensions industry lobbying to water down the test that will be used to decide whether an employer's pension scheme is good enough to qualify as an alternative to the new Personal Accounts scheme, due to start in 2012.

To gain exemption, employers will need to show that they are making minimum contributions, calculated as a percentage on a band of earnings, that are at least as good as those required by personal accounts. The Pensions Bill, currently going through the House of Lords, contains a broad definition of earnings, including bonuses, allowances and overtime - all of which must attract this minimum contribution for every employee. But some industry and employer groups are arguing that some types of earnings should be exempt or that the test should be weakened in another way, such as allowing a proportion of scheme members to receive smaller contributions.

The TUC recognises that the Bill needs to make clear that the minimum contributions test should be applied over a year, not within each payment period. So, for example, a non-pensionable Christmas bonus that provides a one-off distortion in a December pay packet should not disqualify a scheme that easily makes the contributions required over the year.

In a letter to Pensions Minister Mike O'Brien, TUC Assistant General Secretary Kay Carberry says: 'We have always supported the broad definition of pay set out in the Bill. If it is not widely drawn there is the potential for unscrupulous employers to try to redefine part of the wage packet as a bonus or some other non-qualifying element of pay in order to reduce their pension contribution.'

The letter continues: 'We are worried that any move, even to meet legitimate problems, could have unintended consequences. Employers are already used to exploiting any potential loophole in tax legislation to minimise their tax bill and would do the same with pensions.

'We would emphasise that the contribution requirement in the bill is a bare minimum. Understandably people talk in shorthand of an eight per cent contribution. But it is an eight per cent contribution only on a band of pay. Many lower paid workers will therefore find a significant part of their pay does not attract pension contributions. The phased requirement that schemes should meet this very minimal contribution level is not onerous. Any scheme that does not meet this minimum requirement for the great majority of its staff is a very minimal - if not downright mean - scheme.

'We therefore strongly oppose any amendments to the Bill that would mean any employee was not getting this minimal eight per cent over the relevant earnings band. This would be a fundamental breach of the new pensions consensus. Acceptance of such a low contribution rate was a very significant compromise by the TUC, and we could not accept any exemptions.

'We recognise however that because some existing DC schemes are constructed on a very different basis to personal accounts the current definition of qualifying earnings can produce some difficulties, even in schemes that we would recognise as essentially more generous than the minimum requirement in the bill. There seem to us to be two particular problems with which it is reasonable for the Government to recognise:

• The Bill currently appears to require schemes to meet the contribution requirements in each pay period. We recognise, for example, that a generous but 'unpensioned' Christmas bonus could cause a scheme to breach the minimum requirement in the December pay period even though the contributions the rest of the year exceed the minimum requirement.
• Pension schemes that mostly meet the contribution conditions but have some problems will face some expense in changing their rules to meet the new minimum requirement.

'We therefore can support changes in two areas:

• We think it is reasonable to assess whether a scheme member has received their minimum contributions over a year rather than within each pay period (subject to safeguards to stop employers putting all contributions in the bank and handing them over only at the end of the year). Any employer large or organised enough to have a pension scheme will have a computerised payroll system and will already need to do annual reconciliations for tax and NI purposes, and this is not therefore a difficult burden. This should solve the vast majority of problems as any scheme that cannot meet this test for the vast majority of its staff over the period of a year would be too minimal to count as a qualifying scheme.

We accept that there may still be a few anomalous instances where a few staff fail the test over the year because of unusual circumstances such as non-pensionable overtime making up a very large part of income. In this case we think it would be reasonable to require the employer to make a one off payment to cover both the employer and worker shortfall as part of an annual reconciliation. Making the employer pay will prevent the employee being presented with an unexpected - and possibly unaffordable - one-off deduction from their pay-packet.

• We accept that that it should be made as easy as possible for trust based schemes to change their rules to ensure that all members make the minimum contributions required by the Bill. This will be a legal requirement for a qualifying scheme and schemes have no option but to make these changes. This does not provide a basis for meaningful consultations, so we accept that there is no point on insisting on consultation in this special and limited case. If a change to the rules requires an increase in member contributions then we do insist that members should be informed and assume trustees would be obliged to communicate to members. It would not be helpful for this to be presented as cutting consultation requirements 'to ease employer burdens', as the rationale is rather that there is nothing to consult about.

'It is worth noting that employers would still face the full legal and consultation costs if they wish to level down, as some fear they will.

'I understand that you have been subject to heavy lobbying on this issue by some parts of the pensions industry. We know the difficulty of maintaining the consensus and that this involves a certain degree of compromise, but during the passage of the Bill the pensions industry has received the extremely good news that the EU, with our support, will allow auto-enrolment even in commercially run workplace pensions.'

NOTES TO EDITORS:

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Contacts:

Media enquiries:
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk

Press release (1,200 words) issued 15 Sep 2008