Get ready for pension reforms

If you read nothing else, read this…

• Employers should consider reviewing their pensions portfolio to ensure they offer the best possible package. For example, is the pension plan run via a salary sacrifice arrangement?

• Encourage staff to use tax-efficient benefits, such as childcare vouchers and bikes for work. This could make a difference to their monthly outgoings.

‘• Save-more-tomorrow’ lets staff sign up for future increases at no cost now.

• Financial education should be part of an overall education programme.

Employees may need help and guidance to cope with the extra costs of the 2012 pension reforms, says Georgina Fuller

The government’s plans to auto-enrol employees into an occupational pension scheme will revolutionise the UK’s pension system when the reforms are introduced from October 2012. Under the rules, employers will have to enrol all staff over the age of 22 who are earning more than £7,475 a year. Along with compulsory employer and employee contributions, auto-enrolment will be introduced in phases over four years, with the largest employers
(120,000-plus staff) starting first. Employers will eventually contribute 3% and employees 4% (with a 1% tax break added in).

This has raised questions about the financial impact the reforms will have on the average employee and how employers can help staff budget for and meet the extra costs.

Although staff in larger organisations will be the first to make contributions, there will be more of an impact on those in smaller businesses, says Steve Herbert, head of benefits strategy at Jelf Group. “Larger employers often already have an established benefits and pension offering in place, supported by generous employer pension contributions and guidance,” he says. “So these organisations are likely to face a less onerous situation than smaller employers that sometimes provide little or no pension support for lower salary grade staff.”

There will also be a big impact on the seven million people not currently paying into a pension, because their monthly income will fall. “At a time when pay rises are low or non-existent, and inflation is rising, any further
impact on the employee’s take-home pay is likely to be problematic,” says Herbert.

Achieving maximum benefits

Helen Craik, operations director at Asperity Employee Benefits, says employers must ensure their pensions portfolio is geared towards offering staff maximum benefits, and there are certain factors to consider. “Is the pension scheme run under a salary sacrifice arrangement?” she says. “Are they offering a wide range of low-cost benefits to meet employees’ needs? Are they spending their benefits budget on outdated or highcost/low-impact benefits? A full review and good planning are an excellent place to start.”

Offering voluntary benefits could help staff meet extra pension costs and save money on everyday goods and services. Tax-efficient benefits, such as childcare vouchers, local discounts and bikes for work, could also make a difference to monthly outgoings, and access to health cash plans could help spread the costs of dental and optical bills.

‘Save more tomorrow’ schemes can also be effective in the long term, says Herbert. “It works on the principle that we all know we should save for retirement, but few of us want to part with the money now,” he explains. “One answer is the employee signs up to a plan that automatically increases contributions in future years without necessarily spending any extra today, thus helping to bridge any savings shortfall over time.”

But one of the most critical factors is financial education. It is all very well having a good benefits package, but it must be communicated effectively. Independent reward and recognition consultant Paul Chadwick says: “Traditionally, some employers have provided pre-retirement courses for staff in the later stage of working life. They may need to bring financial education to the forefront much earlier in the employee lifecycle.”

Read more on the 2012 pension reforms