Press Release

Government’s personal accounts pension scheme needs significant fine-tuning

7 May 2008

As the Pensions Bill enters the House of Lords during its final stages, ACCA’s (the Association of Chartered Certified Accountants) Small Business Committee urges Government to rethink its pension plans, or risk introducing a pension scheme set for failure.

The Committee is concerned that Government has yet to resolve some fundamental issues which will lead to the over-burdening of SME’s, on who the overall success of the scheme will ultimately depend.¹

“We fear that the introduction of the scheme could have unintended consequences. The increase in paperwork could lead to increased reluctance to SMEs to take on permanent staff, and could even encourage employers to scale down their existing, better quality schemes to the minimum requirement” says Professor Robin Jarvis, ACCA’s Head of SME Affairs Unit.

When the Pensions Bill is passed, employers who do not already offer a pension scheme will be required to automatically enrol their employees into the personal accounts scheme. This will mean a 4% deduction from employees pay, matched by 3% from the employer. ACCA’s Small Business Committee praises the attempt to tackle the UK’s pressing problem of paying for a rapidly ageing population, however it believes that major conflicts within the Bill have not been thought through.

Directly conflicting with small business’s calls for PAYE / National Insurance simplification, Government will effectively create a three tier deduction system - Income Tax, National Insurance Contributions, and the new personal accounts scheme. The scheme could ultimately lead to Government missing its own target to reduce the administrative cost of complying with regulation by 25% by 2010.

And ACCA is concerned that little thought also appears to have been given to education of staff about the new pension scheme. “The personal accounts scheme relies on the apathy of those being enrolled. Unfortunately, we believe that the Government has underestimated the need for financial education to make the scheme a success. Without this problem being directly addressed, the mammoth task of educating staff on pensions, and the associated concerns about joining the scheme, will fall to the employers.”

The automatic enrolment appears to disregard the cost of administrative burdens on SMEs. Not giving employees adequate opportunity to opt-out of the scheme will mean that employers will not only have to administer enrolment, but the subsequent opt-outs of those who never wanted to be enrolled in the first place. While the Department of Work and Pensions research has suggested that the rate of subsequent opt-out will be low, the true level of opt-out cannot be forecast with any certainty.

“It looks possible that the scheme may not even provide sufficient income in retirement for the very groups for which it was intended: Women who have taken career breaks to care for children are an example of those who may find they have not accrued sufficient pension through the personal accounts scheme for their retirement.” Professor Jarvis explains.

ACCA’s Small Business Committee has published a policy paper ‘Pensions - the Small Business Perspective’ which covers the above issues in further details, and also points to some specific recommendations to resolve conflicts within the current proposals.

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