Recent research by the NAPF (2008 Survey) shows that one in every five schemes will level down by either lowering contributions or switching new employees to personal accounts from 2012.
A key contributor to this is the risk of increased administration for employers as a result of the Pensions Bill. The bill requires that every employee receives at least the minimum contribution required for personal accounts – that is, 8% of qualifying earnings, of which 3% must be made by the employer. Qualifying earnings is a band of total earnings, including bonus, commission and overtime.
The principle that each employee should get a minimum contribution is a sound one. But many existing workplace and occupational schemes calculate contributions based on an employee’s whole basic salary, from the first pound they earn. Others use whole basic salary plus some elements of bonuses. The regulations may also force employers to reconcile contributions against the benchmark, or change the rules to make it easier to compare (or avoid reconciliation). The problem is that when you make changes for one person in your workforce, you end up changing the rules for everyone, and so some people will lose out – particularly lower earners, who don’t earn high levels of commission or overtime.
The industry has argued long and hard over the last 11 months in an attempt to find an easy solution to this dilemma. The good news is that the government is now listening, and has agreed to introduce the option of self-certification for employers. This means if employers are confident their pension contributions for all members are greater than the minimum, they may not need to carry out any calculations.
However, we need to be sure this option works in practice. Our aim has to be to eradicate the need for employers who already offer a good pension scheme to carry out yearly calculations. We’ll carry on working with the government to make sure these employers continue to offer good quality pension plans to their employees. Forcing employers through bureaucratic hoops will only run the risk that employers level down to the government benchmark, meaning low earners – a disproportionate number of whom are women – could be hit hardest.
It’s important that corporate advisers also start working on reducing the risk of employers levelling down contributions. The vast majority of organisations have so far failed to discuss the issue of the new employer pension responsibilities at a governance, trustee or board meeting. The first step for corporate advisers, then, must be to make all their clients aware of the changes due in 2012 and start discussing what employers should start thinking and talking about.
The introduction of the new employer pension responsibilities will see the majority of employees saving for their retirement, but it’s unlikely to remove the apathy and lack of understanding that many people still feel towards pensions. So corporate advisers should start looking at ways to educate employees by improving engagement with them.
We know that it’s not always possible to provide faceto- face advice, but online solutions can go a long way to help with this. Online mini training modules, quizzes and calculators make learning less stressful and easily accessible for employees, and can help them to gauge how much they’ve learned. And tools like risk profilers, portfolio planners and benefit forecasters can help them make decisions on the level of contributions and fund choices.
For new schemes that are to be set up, corporate advisers should keep in mind the current understanding of where the market could be in 2012 in terms of salary definition, contribution levels and how many people will be in the scheme (given autoenrolment). Finally, they should start reviewing their providers, aligning themselves with those who can complement and enhance their advice and support services to corporate clients.