More than half (57%) of employers with defined benefit (DB) pensions have yet to consider, or determine how to address, the increase in payroll costs resulting from changes in the way State benefits integrate with DB pension plans, according to research by Mercer.
This compares with 70% of respondents with defined contribution (DC) schemes, according to the benefits consultant’s Contracting out survey, which analyses responses from 142 employers with nearly one million employees.
From April 2016, a new single tier pension, expected to be at least £148.40 per week, will replace the five separate elements of the current UK State pension.
The option to ’contract out’ of the additional State pension will also be removed, resulting in an increase in national insurance costs for employers and members in most DB pension schemes.
The Pensions Act, which will come into force on 6 April 2016, provides employers with a limited power to amend their pension schemes to offset these cost increases. However, employers will still need to work closely with their schemes’ trustees and consult effectively with employees on their proposals before amendments can be implemented.
But only 43% of respondents with DB schemes had considered the impact of the reforms and have an agreed course of action, according to the research, and of those almost half were not proposing to amend their DB scheme.
A further 27% had considered them, but had not yet determined whether to take action, while nearly a third (30%) of respondents had not considered the issue at all.
The research also found that respondents were less aware of the impact that the changes will have on DC schemes, with only 40% of respondents having considered the impact.
Dr Deborah Cooper, a partner at Mercer, said: “The government’s aim to simplify State pension provision is laudable, but the transition will create DB and DC winners and losers.
“Employers need to be thinking through the implications sooner rather than later. In the absence of any action, employers will see payroll costs increase by between 2% and 3% for employees who are still earning benefits in DB pension arrangements.
“Furthermore, the introduction of the single tier pension will reduce expected retirement incomes for many members in DC schemes.
“It is understandable that employers’ focus has been on DB cost increase, but for many DC members the introduction of the single tier pension will reduce their retirement incomes.
“Organisations that don’t consider the implications for DC members might find that large numbers of employees are unable to retire, and this will have a profound impact on career progression, staff motivation and health costs.”
