The government is bringing in a new national private pension plan in 2012. Ian Bird explains how this will change UK pension provision and recommends employers start preparing now.
Did you know that the number of people aged 65 or older is set to increase by 22% by 2032? (Source: Office for National Statistics)
2012 – Personal Accounts
I believe that around seven million people are currently under-saving for their retirement and to combat this problem the government is introducing pension reform with the aim of simplifying pensions and to overcome the obstacles to saving. 2012 will herald the introduction of Personal Accounts – the new, government-proposed, national private pension plan.
The Personal Accounts scheme will be:
- a trust-based occupational pension scheme (charges have not yet been agreed);
- one of the automatic enrolment schemes under the government’s reforms;
- regulated by the Pensions Regulator ; and
- open to any employer that wants to use it. Like any other automatic enrolment scheme, employers can offer more than the minimum requirements through the personal accounts scheme.
From the evidence I have seen the UK is in the grip of a pensions crisis. We are a nation with an increasingly ageing population, high levels of pensioner poverty, a widespread lack of public confidence in the state pension system, and millions of individuals still under-saving for their retirement.
The proposed Personal Accounts schemes are the government’s attempt to find a long-term answer. On the basis of the proposals we have seen so far – and which are fairly advanced – it seems that from 2012, UK employers will have one of three choices: to enrol all eligible employees in a Personal Account; into the organisation’s existing pension plan; provided that the plan is as good as a Personal Account; or a combination of the two.
Eligible staff are:
- those aged between 22 and state pensionable age (SPA), who earn between £5,035 and £33,540 a year;
- those aged between 16 and 22 can also choose to opt-in; and
- agency workers, fixed term and part time contract workers are also included.
Under the current proposals, employers will be required to contribute a minimum of 3 per cent of salaries to an employee’s workplace pension scheme, although initial contributions will be phased in over three years. This will supplement the 4 per cent contribution from the employee and around 1 per cent from the government in the form of tax relief.
Contribution rates will be phased in over the first three years of the scheme, starting initially with larger employers, who will be required to comply first.
Although, it should be noted that employees will have the right to opt out; employers will not, and I believe the financial burden may be considerable for those not already offering a pension, or with low take-up of their current scheme.
For those organisations not currently offering a pension scheme, the arguments for considering this now (as opposed to waiting until 2012) could be compelling. To me the big question that all organisations now need to ask themselves is ‘are we ready for 2012’?
Many anticipate that automatic enrolment will significantly increase the number of people saving in a pension plan for their retirement. The new government system could lead effectively, to huge numbers of employees – potentially – saving for their pensions for the first time. However, this could come at a cost to employers, through increased administration, contributions, payroll costs and penalties for non-compliance.
According to the current proposals, employers already offering suitable occupation of personal pension schemes will be exempt from enrolling active scheme members into personal accounts, if the scheme satisfies a prescribed quality test.
Means-tested benefits
One of the most significant concerns I have over 2012 is the potential reduction in some employee’s means-tested benefits. For example, the government operates a minimum income guarantee of around £100 per week for a single person over the age of 60. All state and private pensions – together with any earnings and the value of their savings – are assessed with income topped up to the minimum if necessary. Therefore for some, saving into a Personal Account may reduce the amount of the means-tested benefit payable. It should be remembered that these staff members could select to opt-out of the scheme.
Pre A-Day benefits
I believe there could also be issues for senior employees with previously existing and larger pension pots, who have elected to protect their pension funds prior to the pension simplification legislation (A-Day ). If an employer was to auto enrol their employee into a pension arrangement in 2012 (or a registered group life scheme now) then they could lose their protection and cause a tax charge of up to 55 per cent of their funds above the lifetime allowance. To my mind the situation is easily avoidable as long as staff are properly communicated with.
Final salary pension schemes
Based on the proposals, it seems to me that organisations offering final salary schemes could be at risk of considerable cost increases when we reach 2012. It could help these organisations to carefully consider not only the cost implication of auto enrolling current non members but also the impact on the membership of the existing scheme and any deficit that the scheme may already be in.
I believe that the advent of 2012, combined with the current financial climate, will see an increased number of final salary schemes wound up. This, in turn, could pose another potential problem for employers in terms of how they reward and motivate their staff, particularly existing pension scheme members, if these schemes are not as attractive in the future.
Salary sacrifice
In my experience, salary sacrifice has proved a cost-effective way to get more into employees’ pensions. Employees elect to reduce their salary and have this sacrificed salary paid into their pension. As the employer will not have to pay National Insurance (NI) on the sacrificed salary, this contribution can be enhanced by redirecting some of all of the NI saving into the employee’s pension. However, there are other considerations to keep in mind when considering this route, and it is important to take advice on this.
Consulting with staff
Organisations employing over fifty staff or more have an obligation to consult their staff when they intend to cease or change an existing pension scheme or introduce a new pension arrangement. However, it is good practice for all employers, irrespective of their size, to consult their employees.
Consultation is required with active and prospective members, but not with deferred or pensioner members. Organisations must make arrangements which secure that, so far as is reasonably practicable, all affected members are covered and a minimum of 60 days is laid down for the consultation period, which can only be reduced by direct permission of the Pension Regulator (see note 1 below).
Plan now for the future
Foster Denovo has created a forecasting tool for those organisations not currently offering a pension scheme or who have limited take up of their existing scheme. This shows how employers could potentially manage their finances by enrolling employees in a quality pension before legislation comes into force
We believe a proactive approach could make the changes in 2012 more manageable and furthermore, assist in demonstrating a commitment to staff.
To me, if employers are going to succeed with 2012, then it will be all about educating and communicating with staff. I believe they need to feel empowered, and be given a level of control over their investments. Communicating a technically difficult subject such as pensions is never easy. In my opinion if we are going to beat the pensions crises, then employers need to begin effectively communicating to young employees, who – in turn – need to begin investing for the future.
What could employers do now to prepare for the change?
- Budget now
- Decide which type of pension to offer staff
- Check whether an existing scheme meets the government’s requirements
- Consider the impact upon retention and recruitment of employees
- Decide how you will communicate the changes to staff
- Check to see you have the right systems in place
- Start all of these preparations NOW…opting out is not an option