The pensions crisis and 2012

Changes to pension legislation in 2012 will revolutionise the balance of responsibility between company and employee.

Ian Bird, principal partner at financial advisory firm Foster Denovo, explains what companies need to consider now.

Changes to pension legislation in 2012 will revolutionise the balance of responsibility between company and employee. Ian Bird, principal partner at financial advisory firm Foster Denovo, explains what companies need to consider now.

Pension schemes are in shortfall, even among FTSE 100 companies, and millions are still under-saving for their retirement. Research we commissioned from YouGov recently revealed that more than a third of adults in the UK do not have a personal or company pension plan in place.

The personal accounts scheme is the government’s long-term answer to the current pensions crisis. Personal accounts will see every employee in the country being auto-enrolled into a pension, the idea being to boost the income of tomorrow’s pensioners and make saving for retirement the default option.

In 2012, employers will be faced with two choices: they will either have to enroll most of their employees into an existing pension plan they have in place, or they will have to enroll eligible employees into a personal account. Crucially, if the first option is selected, the existing scheme must be as good as a personal account.

Employees will have the right to opt out of personal accounts, but employers won’t. And, for those not already offering staff a pension, or with low take-up of their current scheme, personal accounts could prove costly.

Employers’ responsibilities
The government is beginning to ask more of employers than ever before. Companies today are responsible for a host of jobs that used to be carried out by the state, from collecting National Insurance contributions and student loans, to – it seems –  administering their pension contributions through the personal accounts legislation. I have spoken to a wide variety of firms about the proposed changes and there is increasing disquiet about the possible financial burden that the 2012 personal accounts scheme will place on companies. There is also a wide variety of possible solutions that companies are considering.

Under the current 2012 proposals, employers will be required to contribute a minimum of three per cent of salary to an employee’s workplace pension scheme, and initial contributions will be phased in over three years. This will be supplemented by four percent from the employee, and around one percent from the government, as tax relief.

‘The government is asking more of employers than ever before’

Financial directors should carry out careful planning now, if they are to manage the cost implications of 2012. For those not currently offering a pension or with limited take up of an existing scheme, it would be worth considering enrolling employees in a quality pension before the legislation comes into force – this will help to manage costs. Waiting until 2012 means that employers will pay an additional three per cent of the salary at the given time. Spreading costs between pay rises and pension contributions, and gradually introducing pension contributions for staff over the next three years will help to make the changes more manageable and will also demonstrate a commitment to the workforce.

Not for everyone
Auto-enrollment into Personal Accounts will not be for everyone. One concern of the 2012 scheme is the potential reduction in some employees’ means-tested benefits. Unless means testing is removed many older staff will be enrolled into pensions that could potentially reduce their benefits in retirement.

The government currently operates a minimum income guarantee of around £100 per week for a single person over the age of 60. All state and private pensions, along with 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 that is payable.

There could also be some issues for employees with previously existing and larger pension pots. These people could have taken “enhanced protection” to protect their pension funds prior to the pension simplification legislation (A-Day). One of the requirements to keep this protection is that no further employee or employer contributions are made to pension arrangements. If an employer was to auto-enroll their employee into a pension arrangement in 2012 (or a registered group life scheme now) then they will lose their protection and invite a tax charge of up to 55 percent of their funds above the lifetime allowance.

It is imperative for employers to communicate with and educate their staff about 2012. If we are going to beat the pensions crisis, then employers need to being investing in their staff’s future – and start tackling these proposed changes as soon as possible.

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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