This article is brought to you by our sponsor Scottish Life.
Steve Bee, head of pensions strategy at Scottish Life, says that as the pensions debate rages with 2012 changes ahead, employers can get a head start by looking into auto-enrolment to schemes now
The Pensions Bill 2007, which was introduced to Parliament in December last year, included some detail of what the new national pensions savings scheme will look like in 2012. If the Bill comes to fruition, in the shape of the Pensions Act 2008, what will it mean for employers and is there anything they can do now to reduce its impact and be seen as a best practice organisation?The national pensions savings scheme will, for the first time, force employers to auto-enrol employees into personal accounts or into a pension scheme that will provide similar value and benefits.
What the Pensions Bill does is set out what existing schemes must provide in order to exempt employers from personal accounts. In short, if an employer auto-enrols all relevant staff into a final salary scheme, which is either contracted-out or provides benefits based on average earnings in the last three years of service and 1/120th accrual, then they will be exempt.
But most work-based pension schemes in the UK now are money purchase schemes, whether these are trust based or contract based. For these schemes, the exemption to auto-enrol into personal accounts will be based on the contribution rates employers and employees make to the scheme. If this is the same as, or higher than, the amount that would have to be paid into personal accounts, then employers can auto-enrol their employees into the existing scheme.
There is one exception however. At the moment, a European directive prevents employees from being auto-enrolled into group personal pension and group stakeholder schemes. The Pensions Bill doesn’t address this issue, although the government says that it is continuing to look for ways to resolve this particular problem. But if an employer already provides a scheme that offers higher contributions than the minimum required under personal accounts, there’s a real danger that they will simply close off that scheme and offer the lower-cost personal account alternative instead. This levelling-down approach is something that the government is aware of and keen to prevent. There is little in the current Pensions Bill that tackles this tricky subject, but it is likely we will see regulations that will aim to stop this happening on a widespread basis.
Whether employers level down or not will largely depend on how they value offering a pension scheme to staff. The 2007 Review and pension trends survey report by the Association of Consulting Actuaries suggests employers do see the value of offering a decent pension scheme. But it also indicates most – 82% of them – do not currently auto-enrol employees into the existing scheme.
If employers want to continue to offer a valuable pension scheme to their employees, there are a few simple steps that they can take. If they don’t already do so, then they can communicate the value of their pension scheme as part of the overall benefits package to employees, in real money terms.
Organisations can also run a campaign to encourage take-up. Most providers will provide worksite marketing material free of charge, or at a cost-effective rate, where the scheme is already with them. After all, it is in their interests to increase scheme take-up.
To avoid the 2012 rush and spread the cost of auto-enrolment, employers could get a head start by kicking off an auto-enrolment process together with communication and marketing. Getting auto-enrolment procedures in place as early as possible will help employers avoid the potential impact of personal accounts.
The views and opinions in this article are those of our sponsor, Scottish Life, and do not necessarily reflect those of www.employeebenefits.co.uk.