Personal Accounts - Waiting periods allowed if employer contributions 6% or more

Employers who offer personal accounts will have to enrol staff into personal accounts immediately - on the first day of starting employment.

However, the Pensions Bill allows regulations to be introduced which would permit alternative good quality schemes offered by an employer to operate a waiting period.

In other words the scheme would not need to offer staff membership until they had been continuously employed for a certain period of time.

Within the committee stages of the Pensions Bill, the Minister of State for Pensions Reform, Mike O'Brien said that an employer would need to pay a contribution of at least 6% before a waiting period would be allowed within that scheme.

He also confirmed that the maximum waiting period the Government is considering is three months.

The three month period does seem to be open to some debate as Mike O'Brien said: 'Three months is the sort of period we are considering as a reasonable maximum but I am not being dogmatic about that as we are prepared to discuss it further as part of a consensus-building approach when we may consider some sliding scales or say that three months is right.

Some employers have very strong views; if they make a contribution of, say 12, 13 or 14 per cent., as some good employers do, there may be an argument for giving them a longer deferral period.' However the need for an employer to pay at a contribution of at least 6% before they are allowed to operate a waiting period appears to be more definite.

Mike O'Brien said 'I am fairly clear that 6 per cent is the level at which I want this to kick in'.

However it would appear a higher total contribution to the scheme is not necessary to be allowed to operate a waiting period - simply a higher employer contribution.

It would appear that if the employer pays 6% and the employee 2%, it achieves the minimum contribution necessary to be exempt from personal accounts (an 8% contribution in total) and as the employer is paying 6% the scheme would be allowed to operate a waiting period.

Background info: Some employer pension schemes operate some form of waiting period although many have no waiting period.

For those schemes operating a waiting period the majority are within the range of 3 months to 1 year.

The 2004 GAD pensions survey has figures for waiting periods in occupational schemes.

The average employer contribution to money purchase pension schemes in the UK is around 6% (source: Association of Consulting Actuaries Pension Trends report published 19 Dec 2007) Andrew Tully, Marketing Technical Manager at Standard Life said:'This proposal will allow the many employers offering good quality pension schemes to continue operating a waiting period within their pension scheme.

It will hopefully help limit the number of employers who make significant changes to their existing good quality schemes - either by closing it completely or reducing the contribution level.

And it will particularly benefit employers who have a high turnover of staff.

But if the aim is to encourage better pension provision in the UK, it seems questionable why one scheme offering an 8% contribution should be allowed to operate a waiting period while another with the same rate cannot.

It would seem more sensible to require a higher total contribution before a waiting period can be used.'.

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