Member Article

THE PENSIONS’ CONUNDRUM

Ensuring financial security in retirement has become increasingly difficult in recent years. The British state pension celebrated its 100thbirthday in 2009 but the last 30 years has seen a significant decline in its absolute value.

Those with a private pension have seen its worth fall dramatically as global economic uncertainty has driven down share values and the Bank of England’s QE policy has had a clear negative impact on annuity rates.

Despite this troubled ‘pensions landscape’, apathy towards saving for retirement amongst the young, and even those approaching middle age, is manifest. Ian Pickett of Drayton Partners said: “Individuals are more focussed on the short term when considering a career move and are interested in the immediate benefits such as base salary, company car and bonus opportunities. It tends to be the individuals fortunate to still have final salary schemes who, understandably, demand extra information. In fact, it’s surprising how few employers know the details of their own pension schemes and frequently have to seek internal guidance to get additional information.”

Sharing the burden with the private sector

Ian continues: “The first step towards improving the outlook for the UK’s ageing population is improved pension cover for all. However, reducing the number of people who are solely reliant on the state is crucial for ‘UK plc’ which will involve asking the private sector to bear some of the burden.”

From October 2012 employers will need to start enrolling their “jobholders” in a pension scheme which meets certain minimum requirements, or in the National Employment Savings Trust “NEST”), introduced by the Pensions Act 2008. This places the onus on employers to assess their workforce to ensure that those jobholders who are eligible for auto-enrolment are enrolled.

If employers do not comply with duties imposed by the Act then they may be fined so it is necessary to put plans in motion and get the ball rolling to ensure the business is fully prepared for the changes that are to come into force. The Act imposes different obligations on employers depending on the category of ‘worker’ that each member of the workforce falls in to. It will, therefore, be necessary for employers to assess their workforce to determine which categories apply in any given scenario.

What is ‘automatic enrolment’?

Qualifying schemes must meet certain quality requirements, the first of which is to pay a minimum level of contributions. The minimum contribution level will eventually reach 8% of a band of earnings (for the tax year 2011/2012 this will be £5,715 to £38,185), with employers contributing a minimum of 3%, the employee 4% and a further 1% paid by the government as tax relief.

Ian said: “It is imperative that all companies are ready for auto-enrolment by reviewing their existing pension scheme to determine whether it meets administrative requirements”.

The Government has established NEST, a registered pension scheme that qualifies as an auto-enrolment scheme; however there is no compulsion to join this scheme.

Ian continues: “After the initial assessment of the workforce and determining whether the pension scheme is sufficient, there are further obligations that employers need to consider. These include registering with the pensions regulator, communicating the change to all workers, automatically enrolling eligible jobholders and ensuring that non-eligible jobholders and eligible workers receive their entitlements.

“The changes introduced by the Act have the potential to be extremely time consuming for large and small employers alike – however, with warnings and fines waiting for those employers who do not comply, the time for action is now.”

A survey, conducted by the insurance company Partnership, showed that eight out of ten people didn’t understand their pension. The professionals interviewed cited three main problems: apathy, a lack of education about retirement options and a “general fear of pensions”. Companies therefore need to create an environment where their employees better understand, and perhaps get more involved in, pension provision. This will drive retention over the longer term.

Ian concludes: “Companies who want to retain and attract the best employees will need to go beyond these new legislative provisions. In the last year we have witnessed a small number of businesses offering enhanced pension schemes to their top talent. With the demise of the final salary scheme maybe we are seeing a new value attached to the “company pension scheme” and we believe the type and depth of a company’s pension provision will become increasingly more important to employees over time.”

For further information about Drayton Partners please visit www.draytonpartners.com

This was posted in Bdaily's Members' News section by Drayton Partners .