HR directors face a tough time tackling issues affecting pensions provision, says Lee Hollingworth, head of DC consulting at Hymans Robertson
Pensions are currently dominating the headlines, with spiralling pension deficits, defined benefit (DB) scheme closures, the introduction of auto-enrolment for all employees from 2012, and changes introduced to pensions tax relief in this year’s Budget. So is it any wonder that pensions are at the top of many HR directors’ to-do lists?
Many of the UK’s largest employers have decided enough is enough and are planning significant changes to their DB schemes, not by simply taking the easy option and closing to new employees, but taking the difficult decision to close their schemes to existing members.
Not a day seems to go by without news of bluechip employers, such as IBM and Fujitsu, intending to close their schemes. This will dramatically increase the number of employees who now rely on some form of defined contribution (DC) pension provision to provide for their future retirement income needs.
Another issue likely to feature on the pensions to-do list are the auto-enrolment regulations that are part of the Pensions Act 2008, which, for many employers, will mean a significant increase in pensions costs. Employers with low take-up of their existing arrangement and/or high staff turnover will be the hardest hit. Although 2012 may seem a long way off, our clients are already seriously considering what the impact of these regulations will mean for them. The answer for many will be a wholesale review of their pensions strategy. Over 30% of respondents to this year’s survey are already making plans on how best to respond to these pension reforms, so it seems that for a large number of employers, there is still work to be done in this area.
On the subject of future pensions legislation, there is a danger that the changes to tax relief for high earners introduced in this year’s Budget will have far-reaching consequences for the future of pensions in the workplace. For an important segment of the workforce, pensions have been rendered irrelevant from 2011 and alternative tax efficient savings solutions will be required. As can be seen from the survey results, this is clearly an issue many HR teams are wrestling with right now.
We believe many employers will reach the conclusion that a new approach is required, and that the one-size-fits-all approach represented by DC pension schemes does not meet the savings needs of a significant percentage of their employees, such as the low-paid, high earners and the young, and that an alternative solution is called for. This alternative could take the shape of a new form of workplace savings plan consisting of a range of employer-sponsored savings products, such as a DC pension scheme, individual savings accounts (Isas), mutual funds, cash saving accounts and employee share schemes hosted on one platform, which is accompanied by a comprehensive range of communications to enhance levels of employee engagement.
One surprise from this year’s survey is the number of employers that are yet to take advantage of salary sacrifice in conjunction with their pension scheme. In the current recessionary environment, the easy win that salary sacrifice represents – generating national insurance savings for both the employer and the employee – implementation seems like a golden opportunity, and one that should not be missed.
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