Pension 2012: What Every UK Business Should Know

Why Act Now?

Business leaders have more pressing
concerns and may feel 2012 is still a way off. But acting ahead of the
regulations gives you time to communicate the changes fully and make adjustments
gradually. Reinsurance and risk expert Benfield, which operates a group
personal pension scheme, has prepared for 2012 by introducing auto-enrolment
for staff well in advance. It means the business will have dealt with any
difficulties well before the regulation comes into force.

Companies will be looking at different ways
of offsetting the costs of enrolling new members and defined benefits schemes
(such as final salary) may prove too costly.

Paul Macro, a senior consultant with human
capital specialists Watson Wyatt, explains: “Organisations that still
have final salary schemes open to new entrants and future accrual are looking
at ways to control and cut costs. Some are going to defined contributions
schemes like stakeholder [schemes]. In 2012 they also have the option to use
the government scheme: personal accounts.”

Some employers may look to strengthen their
scheme to prepare it for an influx of members, meaning that managers may be
required to make extra contributions to keep hold of a valuable pension.

Supermarket giant Tesco has around 250,000
employees with only 153,000 members of its generous final salary and career
average pensions, so the bill for full participation could be massive.

It has asked employees to contribute more
of their own money. Those in its career average scheme will pay five percent
instead of the current 4.75 percent and those in the final salary will pay
seven percent, up from six percent. Anyone unwilling to pay more has been given
permission to opt out of the scheme.

Why it matters to you

Occupational pensions have been a big part
of the benefits package employers can offer top talent, particularly in smaller
businesses. One-third of employees surveyed for the National Association of
Pension Funds for its Workplace Pension survey in April claimed the pension
their employer offered was the most important benefit, beyond bonuses and
holidays.

Consider your arrangements. Take advantage
if the business’s current scheme is generous. It may be possible to
buy extra years in a final salary pension, or make additional contributions to
a defined contribution pension.

Some companies may ‘level down’
to adopt personal accounts as a less generous option, but the NAPF reckons this
is unlikely to happen unless the government swamps existing occupational
schemes with so much red tape that companies seek out the ‘easy’
option.

If your company opts for the minimum
requirement for new pension enrolments, it will hardly secure a comfortable
retirement.

So you may want to look at alternatives to
boost your retirement fund -- additional contributions to the scheme, a
stand-alone pension such as a href="http://www.moneysavingexpert.com/savings/cheap-sipps">self-invested
personal pension or some other sort of investment, such as an href="http://www.hmrc.gov.uk/leaflets/isa-factsheet.htm">individual savings
account (ISA).

Even where organisational pensions are less
generous, managers will still have to make contributions -- everyone will.

This is going to have further implications
for the entire workforce. Without them consenting or requesting it, a chunk of
their salary will disappear overnight, for which they won’t get
immediate benefit.

What managers need to know

Steve Charlton, a principal at Mercer HR Consulting,
says “The government introduced the rules, but it’s the
managers who will have to face irate staff and the HR department that will have
to deal with the phone calls and complaints.”

So it’s worth beginning your
communications campaign now. What decisions have to be made, and by whom? Create
a timetable and decide who should be involved at every stage. Let your teams
know what’s coming, explain the implications to them as individuals
and ensure everyone understands what to do if they want to opt out.

Employees have a natural tendency to switch
off when anyone mentions pensions, so vary the media you use to get your
message across -- calculators on the company intranet, posters and leaflets,
online games and social media tools such as Twitter.

Line managers should be briefed in advance
and it’s worth holding an ‘objections’ session so
they can offer clear and accurate responses to any questions.

If your business isn’t active in
ensuring you’re ready, ask for training. The company can offer 150
of pensions-related financial advice tax-free, so this might be the time to
arrange a session with an independent financial adviser.

At the very least, get your human resources
or pension departments to sit down with key managers and run through what the
company will be doing and how it is going to affect their teams.

Higher earners beware

Don’t forget the change to higher
earners that comes into effect from April 6, 2011. Employees earning more than
150,000 will no longer get higher rate tax relief on their pension
contributions (currently 40 percent) -- it will be restricted to base rate
relief (20 percent).

From 2011 it may actually not be worth
paying into a workplace pension at all -- you could end up paying 20 percent
tax on the way into a scheme, and later 50 percent tax on income, too.

Nor is there any chance of high earners
taking advantage of schemes in the intervening months either, because the
government has limited top-ups, too. Speak to an adviser, or the HR department,
about what is possible under the rules.

The new rules in 2012 are supposed to make
a change for the better. When they’ve had time to bed down, it may
well be welcomed. In Australia, a similar set-up has been running for years and
has become part of the fabric of pay and benefits. People expect monthly
deductions, and look forward to their annual statements, which show the nest
egg they are building for retirement. In the end, employees will be better off.
They just have to get over the 2012 hurdle.