Member Article

Pensions Compulsion ? Right Idea, Wrong Timing

Few would argue that people should save more for their retirement. Life expectancy is increasing and government is alarmed at the prospect of a looming welfare gap for retirees. To combat this it will launch pensions auto-enrolment in October this year. Its target is the 7 million employees who have no occupational pension. Businesses will be required to find 8% of pay (3% from the employer and 5% from staff) and put this in a government approved pension fund.

Business leaders, whilst recognising the retirement savings gap issue, are concerned about timing. Finding 8% of payroll in an economic slow-down will be a challenge.

So what are the main features of Pension Auto-Enrolment?

• Employees earning £7,475 (annualised) with more than three month’s service must be auto-enrolled in a pension scheme or in “NEST”.
• NEST – is the National Employment Savings Trust - a government default pension plan.
• Existing staff pension plans will have to meet specific tests to avoid auto-enrolment requirements.

When does all this start?

1 October 2012 is launch date. But so called “staging dates” have been announced which will defer the start through 2013. Those employing larger numbers of staff will start first. The build up to full contribution levels will also be phased to help ease the transition.

“Staging” and “Phasing” – Sounds Good . This Should Make Life Easier?

Phasing-in the new regime will help but there are still some big challenges including:

• Finding 3% of pay in the current economic climate will be an issue for many businesses. But that’s just the employer contribution. Staff will need to be told that 5% of their pay will be deducted and paid to a pension plan.
• Employers will have to maintain records to demonstrate compliance for all staff.
• Employers with temporary, seasonal or casual staff (such as in the retail sector) will face significant organisational issues in adapting to the new regime.

But Staff Can Opt Out – Can’t They?

They can, but the process is going to be (intentionally) bureaucratic and difficult. The employer cannot be seen to encourage opt-out in any way. Records will need to be maintained. Any opt-out will lapse every three years. The staff who opted-out will be back in again then and will have to go through the same procedure to come out once more.

Overall?

Across Europe governments are seeking to reduce state pension provision with some painful results. Just look at the recent demonstrations in Belgium - not previously viewed as a hot-bed of militancy! The UK already has a relatively low level of state pension and sees compulsory pension saving as essential if retirees are to have an income to live on. This is a generational challenge. Already embattled businesses and their staff will question however whether now is the right time to meet this challenge.

This was posted in Bdaily's Members' News section by Martin Jenkins .