Many employers unprepared for 2012 pension changes

Many UK companies are unprepared for the pension reforms in 2012 and will need to make significant changes to their existing scheme to meet the new legal requirements.

According to research conducted by Watson Wyatt, nearly a third of FTSE100 firms had not considered the implications of 2012 and the introduction of personal accounts on their pension scheme.

Of those that had, 12% said they would have to increase employer costs, and 12% said they expect to change their definition of pensionable earnings. Only a quarter of respondents stated that no changes would be required.

Watson Wyatt’s 2009 FTSE100 Defined Contribution Pension Scheme Survey showed that schemes with auto-enrolment, which will become mandatory in 2012, achieve significantly higher take-up than those that don’t.

More than half (55%) of respondents have a take-up rate of over nine-out-of-ten employees to their defined contribution (DC) schemes.

Among those companies that use auto-enrolment, 90% can achieve a nine-out-of-ten take up rate.

The research, which surveyed 95 FTSE100 employers, revealed that auto-enrolment is currently being used for just 39% of DC schemes, and that 13% of companies had take-up rates of less than a fifth of eligible employees.

Paul Macro, senior consultant at Watson Wyatt, said: “A significant minority of pension schemes currently have a very low take-up rate and the switch to auto-enrolment, combined with mandatory employer contributions, will have a major impact on their payroll expenditure.”

The survey also found average total maximum employer and employee contributions to DC pensions has risen to 15.3 per cent – up from 14.7 per cent last year. This is significantly higher than the 8 per cent on salaries between around £5,000 and £33,000 which will be required after the 2012 changes are fully introduced.

The average core employer contribution rate is 6.7 per cent of salary, with average additional matching contributions taking the average maximum employer contribution rate to 10.1 per cent.

The average core employee contribution rate is 2.5 per cent, with average additional matching contributions bringing the average maximum employee contribution rate up to 5.2 per cent.