Simon Fletcher, client relationship director at Johnson Fleming, says employers should waste no time in getting ready for the 2012 pension reforms
It is widely recognised that people are living longer and not saving enough to give them the income they need in retirement. The Department of Work and Pensions (DWP) estimates that, currently, about seven million people are not saving enough for retirement.
The government acknowledges that many people are simply not enthused by pensions and either do not organise pension savings themselves or do not join the scheme their employer offers. With about 20 million employees in the private sector, the workplace seemed an ideal place to start to make a difference.
Automatic enrolment into a workplace pension scheme and a low-cost default arrangement were first raised by the Pensions Commission when it reported in October 2004 and November 2005. Several consultations, reviews and a change in government later, we now have some clarity on what the new requirements for employers actually are.
In October 2010, the DWP published a report called Making automatic enrolment work, detailing the outcome of a final independent review and accepting all the recommendations contained in the report. It will now move ahead with implementing the reforms on the basis detailed in that report. We also now know the national employment savings trust (Nest) will definitely be the alternative scheme available to all employers and that almost all UK employers will be affected by the new rules.
There are many issues employers now need to address and questions they need to answer. Many of these are covered in this supplement, which provides an ideal summary of the main points you, as an employer, need to consider.
All employers need to conduct an analysis to see how many employees will be affected and whether their existing pension scheme meets the quality requirements. Even if they do have a qualifying scheme, employers must decide whether to use this scheme or simply auto-enrol staff into Nest. Of course, some may decide to use Nest for certain categories of employee and their own scheme for others. Given that auto-enrolment will almost certainly have a direct impact on employers’ pension costs, they may also want to use this as an opportunity to review benefits for all staff, including the ongoing provision of a defined benefit scheme (if applicable).
One group of employees who need to be particularly careful are those with enhanced protection under the A-Day tax regime because this protection would be lost if they made a contribution to a pension scheme. These individuals must opt out immediately after they are auto-enrolled to ensure no contributions are ever actually made. Employers will need to clearly communicate the potential issue to this group of employees and, given their likely profile, face-to-face communication will be most highly valued. These employees will be looking to their employer to have systems and processes in place to ensure their enhanced protection is not lost.
Although the requirements will be phased in over a four-year period starting October 2012 for the largest employers (with 120,000 or more staff), we believe employers should prepare themselves well in advance to avoid any shocks and surprises. We have already begun helping clients conduct the necessary reviews and analyse the options open to them.
Some details are still to be confirmed, mainly relating to Nest, and other issues, such as whether trust-based schemes will still be able to refund contributions to early leavers. All in all, 2011 looks set to be another busy year for all those involved with workplace pension arrangements.