Increasing pension coverage may be a good idea but PRSAs poseproblems for employers, writes Raymond McKenna.

The concept of a low-cost, easily accessible pension, which is realised in PRSAs, has its origin in the Pensions Board's 1998 National Pensions Policy Initiative (NPPI) report.

The goal of increasing pensions coverage is a good one, but the introduction of PRSAs poses potential problems for employers. They must provide access for their staff to these plans, leading inevitably to additional administration and compliance costs.

It may also threaten existing and, arguably, more comprehensive pension planning, if employers opt for the more predictable cost of providing retirement income through PRSAs.

Of the 41 products initially launched, 16 are standard PRSAs and 25 are non-standard. Standard PRSAs have a maximum charging structure that can be imposed by the insurance company. Non-standard PRSAs are not subject to these charging and investment constraints and may have higher levels of charges attached.

Employers who do not provide any form of pension provision for employees who are in employment for more than six months, must provide at least a standard PRSA.

Although not required to contribute to a PRSA, they must facilitate their introduction, notify employees of their rights to contribute and facilitate reasonable access for the PRSA provider to employees.

Because of the range of options available, the selection of a single PRSA is likely to be complex.

The alternative is to grant employees time off to research their individual PRSA which most employers will obviously seek to avoid.

The range of options is, on one level, to be welcomed. However, too many choices can lead to confusion, deferral of decisions and ultimately lack of action. Certainly this has been the experience in the UK where a similar form of pension provision - stakeholder pensions - was introduced to help improve pension coverage and simplify the quagmire of regulations.

However, despite publicity campaigns by insurance companies and employers, the take-up of stakeholder pensions has been very disappointing. This has been attributed firstly to confusion and secondly to little or no incentive for insurers and advisors who felt that the fixed level of charges did not justify the required marketing effort.

Employers must also facilitate the collection of contributions via payroll and remit these to the PRSA provider within 21 days. These additional responsibilities - researching PRSAs, and the collection and submission of contributions - are administratively expensive and time consuming.

This will be further complicated in 2004 with the bringing of benefit in kind (BIK) under the PAYE system. This is in a time when employers are endeavouring to save costs, whether direct or indirect, wherever possible.

The majority of companies with pension schemes still provide pensions to employees on a defined-benefit (DB) basis (84 per cent). DB schemes provide a guaranteed level of income to employees based on service completed with the employer up to retirement age.

Increasingly however, employers are providing pension schemes for employees on a defined-contribution (DC) basis, whereby the value of contributions paid is made available to employees, which, together with investment growth is used at retirement to purchase a pension income.

DC schemes, therefore, by their nature are more attractive to employers as they can reduce costs and volatility of costs.

The move to a DC approach has been accelerated due to complex and onerous accounting standards imposed on DB schemes and, more recently, by the decreasing value in stock markets. Most companies have seen the value of their pension funds decrease by 20 per cent on average in 2002, which has had a significant impact on the solvency of DB arrangements.

The arrival of PRSAs could further encourage employers who want to avoid cost volatility and perhaps the requirement to pay additional contributions to make good any scheme deficit, to revisit and perhaps abandon their DB schemes.

Again, although not quite directly comparable, the arrival of personal pensions in the UK in the late 1980s led to what is being referred to as the "pension mis-selling scandal". In essence, employees were wooed out of generous DB schemes into heavily expensed insurance company contracts set up on a DC basis. Many employees' pension expectations were severely dented leading to investigation of marketing drives by insurance companies and millions of pounds of compensation being paid to disgruntled policyholders.

Whilst potentially improving coverage of pension provision, PRSAs may not be a substitute for existing pension provision whether on a DB or DC basis. Employers and trustees of pension schemes need to consider how PRSAs affect them and evaluate the cost impact, direct and indirect, of their introduction and take appropriate professional advice.

Raymond McKenna is a director of KPMG's People Strategies Division where he leads its Human Capital Practice