Need to know:
- Pension teams are likely to be flooded with queries around the new simplified annual statements, changes to retirement ages and the Pensions Dashboard.
- Salary sacrifice plans will get a fillip from the new Health and Social Care Levy.
- Employers who are not cognisant of their employees’ attitudes to environmental, social and governance (ESG) and climate change could face a backlash.
If there is one thing pension managers should expect next year, it is to be fielding a high level of queries from their members.
Simpler annual benefit statements for auto-enrolment defined contribution (DC) pension schemes will be introduced in October. Banafsheh Ghafoori, senior consultant at Like Minds, says: “The aim of the statements is to improve understanding, so we may see a spike in engagement, with employers inundated with queries from employees about the pension arrangement. It’s a good idea to prepare everyone for this and work with pension providers to understand what the possible questions and impact may be.”
Increases in both the state pension and the normal pension age from 55 to 57 in April 2028, the minimum age at which most savers can access their pensions, will affect employees planning when to finish work. “Many people may have to change their retirement plans and work for longer,” says Ghafoori. “Employers will need to have regular conversations with their employees to understand their plans. They can help by offering financial wellbeing material. This could be signposting to general online material, such as the Money and Pension Service, having bespoke content created for employees or offering workshops, guidance or advice services from a regulated advisor.”
Pensions Dashboard progress
Further out, there will also be a lot of discussion in the general press about the Pensions Dashboard. Regulations are expected early in 2022 that will set out what data has to be supplied to the dashboard and when, with the largest schemes expected to supply data in 2023.
“Once everyone can see all of their pension entitlements in one place, this will stimulate a torrent of questions,” says Steve Webb, partner at Lane, Clark and Peacock (LCP). “Past employees will want to know why a pension is missing or why the amount shown is different to the last statement they received. Although some employees will be delighted to be reunited with lost pensions from previous jobs, many will simply have queries and some of these will come the way of past employers. 2022 is also likely to see growing interest in pension consolidation, as people build up small fragments of pension from different jobs. Whenever there is a pension transfer there is a risk of a scam, and members will need support to avoid falling victim.”
Health and Social Care Levy
The Health and Social Care Levy will have a major impact on salary sacrifice pension schemes. The levy is being introduced in two phases, firstly as a temporary increase to national insurance contributions (NICs) in the 2022/23 tax year. Then, in the tax year 2023/24, it will be formally separated from NICs and operate as a separate stand-alone levy.
“Our expectations are that the temporary increase in NIC will not be treated any differently from current NIC and that the relevant employer and employee rates will simply be increased by 1.25%, meaning the employer rate of 13.8% will increase to 15.05% and the employee rates of 12% or 2% will increase to 13.25% or 3.25% respectively,” says Alan Morahan,
managing director – employee benefits consulting at Punter Southall Aspire. “For schemes that offer salary sacrifice, this will result in increased NIC savings in the 2022/23 tax year. Schemes that don’t operate salary sacrifice won’t benefit and both employers and employees will see an increase in their costs.
“Some employers reinvest some or all of their employer NIC savings in their employees’ pensions. As salary sacrifice is a contractual arrangement, employers should review their employees’ contract wording and update it if necessary. For example, if a contract explicitly states that 13.8% employer NIC savings will be re-invested as a pension contribution, that might require a different approach from contracts that state that 50% or 100% of employer NIC savings will be reinvested.”
Otherwise, the levy will be taking a further bite out of take home pay, an additional hardship on top of inflation and rising household costs. “The victim from this squeeze is likely to be pension contributions if individuals need a way to boost their disposable income,” says Kathryn Fleming, a Senior DC consultant at Hymans Robertson. “Reminding employees of the long-term benefit of continuing to pay pension contributions and the free money they get from their employers as they pay contributions too, may just be enough to encourage employees to keep saving.”
Environmental, social and governance issues
Greater awareness of environmental, social and governance (ESG) matters will also create additional workload. “Over 2022 we are expecting an increase in the number of employers that are reviewing and communicating their sustainable investment beliefs with their employees and what it means for their pension savings,” says Fleming. “A number of employers are at the stage where they are implementing changes to investment funds, to allow for a more climate friendly approach. There will be increasing engagement with this topic, particularly with the efforts from providers to be transparent on where savers money is invested, for example the launch of Scottish Widow’s ESG tool. For employers who have not acted yet, employees may start to ask questions about what role they play in supporting them in this directional change.”