Legal & General Pensions Strategy Director, Adrian Boulding, has warned against the use of Active Member Discounts (AMDs) in pension schemes used for auto enrolling new members as part of the pension's regulations which came into force this month.
Adrian said: "Auto enrolment (AE) works by taking the first pension contribution from peoples' salaries and then giving them the option to opt out of the process. After being auto enrolled they have one month to instruct their employer that they want to opt out. It has become clear that AE could lead to many new pension scheme members who didn't send an instruction to opt out in the permitted time period, being ‘locked into' their company pension scheme involuntarily. It seems unfair to us that these members will face an immediate hike in charges under those schemes that operate an AMD charging structure. We need to see restrictions put in place to prevent pension providers and employers applying a two tier charging structure to new auto enrolled members that could penalise employees just because they have opted out of their pension scheme too late to qualify for a refund of their first contribution. "
Some pension providers apply what is called an Active Member Discount (AMD), which effectively means administrative charges for scheme members who are actively paying into the company's pension scheme are artificially reduced at the expense of the members who have stopped contributions for some reason. Until now the higher administration charges applied only to deferred members, often ex employees who have left the company. However, any employee who is auto enrolled and fails to advise their employer that they do not wish to join within the statutory one month opt out period, runs the risk of being classed as a deferred member in such schemes. Legal & General believes an AMD charging structure being applied to those who have opted out of AE but continue to work for the company is wholly unfair. We also believe that applying an AMD charging structure to employees who leave service should be stopped.
Adrian continued, "This reinforces the need for a system where small amounts of pension contributions are automatically aggregated when people move employers, which will prevent the use of AMDs. While the proposals by the Department for Work and Pensions to legislate for a ‘pot follows member' system will clearly help to solve this problem, we need to ensure that these new generations of savers are not blighted by inappropriate charging structures. There is a real danger that the practice could endanger the whole auto enrolment programme if AMDs are allowed to continue unchecked. "
Legal & General Workplace Savings does not apply AMDs in any of its existing pension schemes, which means future "leavers" will not pay charges based on whether they are actively contributing to a pension scheme. We believe that a clear, transparent and simple approach to pension charges is vital to ensure employee engagement. A charging structure that penalises employees when they leave service is unfair and does not recognise the pattern of employment in the UK. We aim to keep our pension charges as low as possible across all of the pension schemes we offer, whether trust or contract based.
Earlier this month the Pensions Institute published a new report* into defined contribution pension schemes, which highlighted the importance of low charges. Almost one year ago (27 October 2011) the Pensions Regulator warned pension schemes that it does not view active member discounts as "fair" or "acceptable".
|
