Pensions for all
March 2009
Employers need to prepare for the implications of the 2012 Personal Accounts Rules, says Ian Bird
In the world of pensions, major change is afoot. April 2012 will herald the introduction of Personal Accounts – the new government proposed, national private pension plan, which aims to increase pensioners retirement income.
Retirement funding issues
It is easy to forget in the context of the current economic downturn, but in my opinion the UK is also in the grip of a pensions crisis. I believe that there have got to be changes; 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 situation may be dire for many people approaching retirement today.
In recent years the collapse of company pension schemes, pensions mis-selling and pensioner poverty have all made headlines. And many face additional concern over issues like the possibility of having to fund long-term care for themselves, the rising cost of food and energy bills as well as the effects of the stock market collapse on their pension funds. (See also my previous article in Caritas, issue 7, June 2008)
In recent years the collapse of company pension schemes, pensions mis-selling and pensioner poverty have all made headlines. And many face additional concern over issues like the possibility of having to fund long-term care for themselves, the rising cost of food and energy bills as well as the effects of the stock market collapse on their pension funds. (See also my previous article in Caritas, issue 7, June 2008)
The painful truth may also be that future generations of pensioners , those in their twenties and thirties today, may face even more difficult circumstances. The socio-economic shifts (longer life expectancy, ageing population and falling savings rates), underpinning the crisis are long-term problems and the proposed Personal Accounts schemes are the government’s attempt to find a long-term answer.
From April 2012, employers will have one of two choices; to either enrol all eligible employees in a Personal Account, or into the organisation’s existing pension plan, provided that the plan is as good as a Personal Account. Although, it should be noted that employees will have the right to opt out; employers will not and the financial burden may be considerable for those not already offering a pension, or with low take-up of their current scheme. The repercussions could be particularly severe for finance directors who delay any decision until the last minute.
For those organisations not currently offering a pension scheme, the arguments for considering this now (as opposed to waiting until 2012) could be compelling.
Alarmingly, recent research [1] we conducted alongside ACEVO revealed that only 34 per cent of third sector organisations have considered the strategy they will adopt in preparation for 2012, with 15 per cent of respondents unaware of the proposed changes in the first place. The big question that all organisations now need to ask themselves is ‘are we ready
for 2012’?
for 2012’?
Implications of 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 will lead effectively, to huge numbers of employees – aged between 22 and 65 – saving for their pensions for the first time. However, this will come at a cost to employers who will also have to make a compulsory contribution towards their staff pensions.
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.
Good news for employees? You might think so but on the flipside, those already in a good pension scheme where the employer is contributing a reasonable amount (for example 8 per cent), may find their organisations use 2012 as an excuse to decrease the contribution to the requisite 3 per cent.
What do Personal Accounts mean for third sector employers?
Certain organisations will be hit harder than others when pension compulsion comes into effect and clearly – for some – the cost implications of enrolling all staff into a workplace pension scheme could be huge.
Our latest survey findings reveal that nearly two thirds of organisations have less than 60 per cent of their staff currently enrolled into their pension schemes. Consider the impact of now enrolling all staff and some organisations could see their costs go up by hundreds of thousands of pounds almost overnight. (See figure 1 below)
Means tested benefits
The impact on employers will require careful planning from financial directors if they are to manage the cost implications. The impact on the scheme on some employees has also garnered criticism however. One of the most significant concerns 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 that is payable. The result is that some employees may not get very good value for their savings, despite taking into account the contributions received from both their employer and the government.
Historically means testing has stopped some individuals from pension planning, in 2012 unless means testing is removed many older staff will be auto enrolled into schemes which will reduce their take home pay whilst working and reduce potentially their benefits in retirement, hardly an ideal outcome. It should be remembered that these staff members can select to opt-out of the scheme.
Pre A-day Benefits
There could also be some issues for third sector employees with previously existing and larger pension pots. A few very fortunate employees in the charity sector who may have worked previously in the commercial sector (in senior roles) could have elected to protect their pension funds prior to the pension simplification legislation (A-Day). The fund size would have been in the region of £1,500,000 and those with ‘enhanced protection’ may find some of their funds at risk.
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-enrol their employee into a pension arrangement in 2012 (or a registered group life scheme now) then they will lose their protection and cause a tax charge of up to 55 per cent of their funds above the lifetime allowance. So although this will not happen very often, the consequences for the individuals concerned will be considerable. The situation is easily avoidable as long as staff are properly communicated with and serves again to highlight the vital importance of employee communication – at all levels – where any changes affecting the pension scheme are proposed.
Final salary pension schemes
According to ACEVO’s recent research, 21 per cent of charities currently offer their staff a final salary pension scheme. In 38 per cent of these organisations, final salary schemes remain open to new staff, with 77 per cent confirming their commitment to keeping their scheme open to new staff in the future. Such organisations could be at risk of considerable cost increases when we reach 2012. Enrolling large numbers of staff into such a scheme, where contributions are typically higher than those of defined contribution schemes, may just not add up. These organisations need 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.
We believe that the advent of 2012, combined with the current financial climate, will see an increased number of final salary schemes wound up. With such schemes looking increasingly dated, Personal Accounts could prove to be another nail in the – already very well secured – coffin of final salary and defined benefits schemes.
There is general worry that pension compulsion may lead to the ‘levelling down’ of employer pension provisions which could see organisations reduce their contributions or shut more lucrative schemes in favour of the new personal account scheme. This in turn poses another potential problem for employers in terms of how they reward and motivate their staff, particularly existing pension scheme members, if pension schemes are not as attractive in the future.
Consulting with staff
In these times, it is also important to remember that 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. Although in reality it is good practice for all employers, irrespective of their size, to consult their employees.
Consultation is required with active members, 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.[2]
Plan now for the future
What is abundantly clear is that employers need to ensure that they have calculated the probable cost they are likely to incur as a result of 2012 pension legislation and the suitability of their existing pension arrangements in the future.
If companies wait until 2012 and follow the government guidelines, then employers will pay an additional 3 per cent of salary, and employees would also have to contribute 4 per cent of salary when enrolled into the scheme.
Third sector organisations should take the opportunity now to consider how they will pay for 2012 – whether they revise their pension schemes, spread their costs between pay rises and pension contributions, or consider the gradual introduction of pension contributions for staff over the next three years. However organisations eventually fund the likely increase in contributions, a proactive approach now can make the changes in 2012 more manageable and furthermore, assists in demonstrating a commitment to their staff.
Implementing salary sacrifice
Another significant finding of the ACEVO Employee Benefits Survey was the overwhelming lack of organisations that enable staff to make pension contributions via salary sacrifice – with only 19 per cent of charities currently allowing staff to contribute in this manner.
By using salary sacrifice staff can elect to reduce their salaries and in return an employer makes an enhanced pension contribution of the same value often with the employer also adding its national insurance saving of 12.8 per cent of the salary sacrificed. Where all national insurance and tax savings are redirected to a pension scheme the employee pension contribution to a basic rate tax payer can be enhanced by up to 30 per cent. Consideration does need to be given using salary sacrifice where individuals are on or near the minimum wage threshold and there are other implications to state and maternity benefits and it may also reduce the ability to obtain credit.
Communicating with staff
In my opinion if employers are going to succeed with 2012, then it will be all about educating and communicating with staff. 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.
Author: Ian Bird
Ian Bird is a rpincipal partner of independent financial advisers Foster Denovo and is a qualified IFA with over 20 years' experience. Ian specialises in providing employee benefits solutions to the third sector and has worked with acevo and its members for over seven years
There are no comments on this article. Be the first to comment.