Issued: June 2009
Are you on track for 2012 – no, not for the London Olympics but for the Government’s solution to the Pensions Crisis?
The world of pensions does not stand still for long. The pace of change has accelerated in recent years with new pensions legislation now almost a yearly occurrence.
Over the last few years we have seen a huge increase in pension costs. The cost of buying a pension has increased because we are living a lot longer than the actuarial profession predicted, the demands of increased regulation have pushed up prices further as have the levies required to fund the Government’s Pension Protection Fund.
Employers have reacted by closing their final salary pension schemes. The National Association of Pension Schemes reported in their 2008 survey that 72% of final salary pension schemes are now closed to new members. Not surprisingly their replacement schemes are generally poorly funded and have low take up rates. Unfortunately, the continued demise of final salary pension schemes, once the envy of the world, is now an expectation rather than just a worrying trend.
The Government is concerned about the increasing strain this is putting on the State Pension – the pay-as-you-go system. You don’t have to be an Actuary to figure out that there will soon come a point when there won’t be enough workers paying National Insurance contributions and taxes to support the State Pension and means-tested benefits of our ageing population.
If that wasn’t enough we have now entered a ‘credit crunch’ induced global recession that has knocked countless billions of pension balance sheets. Charity and not-for-profit funding is drying up and employees are more concerned about whether they will have a job in a year’s time rather than whether they are saving enough for retirement.
And the Government’s response?
After 18 years in opposition and 11 years in power their solution to the pensions crisis is Personal Accounts, which is based on one of the key proposals that came out of the recent Pensions Commission Report under the chairmanship of Lord Turner.
Now don’t be fooled by the name, the impact of Personal Accounts is going to be massive.
Personal Accounts will target over seven million workers (predominately low to moderately paid) that don’t have access to a good quality work based pension.
Automatic enrolment will ensure that Personal Accounts will rapidly become one of the largest pension schemes in the world, with funds in excess of £100 billion within ten years.
Personal Accounts will be low cost with a target annual management charge of just 0.3%, a lot lower than the 1.0% to 1.5% currently being charged for stakeholder pensions.
Employers – up to speed?
For employers, the key concern will be cost.
If you don’t already have an existing pension scheme at least as good as Personal Accounts, and apparently 85% of UK employers don’t, then expect up to a 3% increase in staffing costs - the 3% is the contribution you will have to make on behalf of your employees. There will be some phasing to ease the burden.
If your existing pension scheme does pass the ‘good quality’ test then you will have some difficult decisions to make. There are three basic options available:
- Keep your existing pension scheme open (i.e. the do nothing approach). This is the most costly and not necessarily the best solution for your staff: there may be a good reason why they have not joined to date.
- Level down contributions of your existing pension scheme to match Personal Accounts. This is likely to still result in an increase in total costs due to increased membership and this is unlikely to be a popular move for your existing scheme members if you reduce their contributions.
- Direct replacement with Personal Accounts. The least costly and probably the most unpopular.
What is clear is that you will need to start planning to build these increased costs into your budgets and funding requirements. Now would also be a good time to review your employee reward strategy. Where are you positioning your organisation? Will you be consulting with staff?
As this is a major Government initiative, we expect wide and extensive publicity both before and after the launch, your employees will be looking to you for answers.
Employees – are you ready to take a plunge?
The biggest question for employees is should I stay in or opt out of Personal Accounts?
The Government hopes that the vast majority will stay in (through inertia if nothing else). If you do opt out, your employer will be required to auto-enrol you back in again every few years.
If it is your first time in a pension scheme be prepared for a reduction in your take home pay by approximately 4%.
Immediate affordability is just one of the considerations. There will be many others including the detrimental impact participating in Personal Accounts could have on your means-tested benefits.
Professional advice does not come cheap so look to your employer, colleagues, unions, friends, family and Government literature, for guidance.
If you can’t afford or don’t wish to be in a pension scheme now, make sure you know how you will manage in retirement, the longest holiday of your life!
Will you be a winner in 2012?
Personal Accounts will dramatically change the provision of pensions in the charitable and not-for-profit sector.
Employers will see their costs increase.
Existing pension provision may be undermined as employers (and funding bodies) may level down to the statutory minimum contribution.
Employees will have some complex decisions to make.
It’s clear that you need to start planning now if you want to be a winner in 2012.
Key facts about Personal Accounts
The Personal Accounts scheme will be:
• A defined contribution occupational pension scheme.
• Trust based and run by a not-for-profit Trustee Corporation in the interests of its members.
• Contributory – statutory minimum employer and employee contributions will apply. After a phasing in period of three years the minimum contribution will be 8% of an employee’s qualifying earnings, with the employer paying 3%, the employee paying 4% and the final 1% from income tax relief.
• Simple and low charge – minimal administration for employers and low costs for members.
• A portable pension – provided their new employer offers Personal Accounts employees will be able to continue making contributions to their Personal Accounts and receiving employer contributions as they move from job to job.
• One of the automatic enrolment schemes under the Government’s reforms. The Personal Accounts scheme is intended to complement existing workplace pension provision.
• Compliant with the minimum requirements set by Government for an automatic enrolment scheme. Personal Accounts will be regulated by The Pensions Regulator.
• Ready for the onset of employer duties from 2012.