The 2012 pension reforms may be costly and unpopular, but they look like they’re here to stay. James Harris reports

The 2012 pension reforms may be costly and unpopular, but they look like they’re here to stay. James Harris reports

The government’s 2012 pension reforms may be a bitter pill to swallow. David Lane, head of M&A at actuarial consultancy Lane Clark and Peacock, says: ‘People don’t like saving and they expect to be kept.’

The new system obliges employers to offer a private sector pension scheme, known as a personal account, to all eligible employees that are not covered by in-house alternatives. Unlike past attempts at encouraging saving, which relied on responsible employees to opt in for ‘stakeholder schemes’, the government is relying on inertia for a mass take-up.

Lane adds: ‘Employees are automatically enrolled on the pension schemes. They can opt out, but under current proposals, the government will make it as difficult as possible to do so. Even if you opt out, you’ll have to go through the same process in three years’ time.’

Contributions to the personal accounts will be staged over a period until eventually employees will provide four per cent of their income, while employers will provide three per cent and the government will contribute one per cent.

The reforms are likely to have an immediate effect on businesses. Esther Smith, employment partner at law firm Thomas Eggar, says: ‘Companies without pension schemes have ignored pensions. As long as they offered a stakeholder scheme that no one signed up to, they were covered. They can’t do that anymore.’

Deal blow

Deal-making is also likely to suffer. Caroline Armitage, corporate partner at Thomas Eggar, says: ‘The higher the cost, the lower the valuation, which may drive down deal activity. Also, the reforms will put more pressure on due diligence, and therefore extend the timescale pre-completion, and when that happens, transactions tend to fall by the wayside.’

In spite of automatic enrolment, widespread adoption of personal accounts is far from certain. Lane says: ‘It depends on the sector. In the financial services industry, most employees elect to go in for a pension scheme, which means that the pension reforms are less likely to affect deals. However in manufacturing and retail, managers might have a scheme, but others are unlikely to have one, so costs will soar. The changes will seriously affect acquisitions in which the target doesn’t run a defined pension scheme.’

Even in industry sectors which traditionally don’t offer pension plans, employees may be reluctant to sign up for personal accounts. Andrew Moss, a partner at accountancy firm Duncan Sheard Glass, says: ‘Most pension investments are equity-based, and a lot of them took big hits in the dotcom bust and recent stock market problems. A lot of people are suspicious of pension schemes and given the opportunity, I think people would rather take the money.’

Charities lead the way

Increased costs and administrative responsibilities might appear to spell doom for deal flow, but in some cases, a hefty pension deficit might generate deals. Armitage points to the example set by the charity sector, in which many organisations already provide defined pension plans to compensate for low pay.

Says Armitage: ‘A lot of the pension pots are in debt and have to pay out because people are retiring. Larger charities are taking smaller ones under their wing [to manage pension exposure] and there will be more consolidation to come.’

Although some businesses may seek solace in the arms of another owing to rising pension costs, the lack of clarity in the reforms means it is hard to know what the costs will be. Lane says: ‘Although the Conservatives have broadly supported the reforms, if they come to power, they might water down the legislation and opt-outs might be easier than people thought. There is a concern that a lot of the details are not yet available.’

The timing is also unfortunate: ‘In cash-constrained times, businesses are looking to cut back on pension provision, especially given the more widespread coverage in the future, which means that existing employees may get a worse pension scheme.’

Not everyone agrees with the course of action taken by the government. Lane adds: ‘I think the government is barking up the wrong tree. There’s a real need to raise the state pension age by a considerable amount. People are fitter now and they can work longer. In fact, a lot of people want to work longer and are being forced out of the labour market.’

For all the challenges that pension reform faces, there is a feeling that something needs to be done. Armitage says: ‘People are living longer and there is a rising pension deficit. It may be too late, but at least it’s a contribution. The 2012 reforms are as good an alternative as any.’