Government proposals could pose additional problems for employers particularly with the rising number of older employees, but greater transparency could make the market easier to regulate, says Professor Les Mayhew, director of the Risk Institute at Cass Business School
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Set to cost industry an estimated £2.3 billion a year in extra employer pension contributions, not to mention the raising of the retirement age, the government’s White Paper on pensions reform has provoked serious discussion up and down the country’s boardrooms.
Reform of the pensions system has been long overdue. Commanding cross-party consensus, the White Paper calls for long-term commitment from politicians and employers. In demographic terms, the UK population is ageing very rapidly. In twenty years, there will be an extra five million people over the age of 65.
Standardising the retirement age for men and women, and eventually raising it to 68 years, will reduce the burden on the state pension while giving people longer to boost their retirement pots. But the paper doesn’t touch the preferential terms of the civil service and some public sector pensions where existing employees’ right to retire at age 60 on a full pension has been preserved. This creates dual citizenship where civil servants continue to enjoy more favourable terms than private sector staff.
Pensions have become a pay issue with unions striking to preserve the value of schemes. In the future, both private and public sector organisations may come to regard bargaining over pensions as a way of offering a pay increase by the back door. As people defer retirement, employers will also have to accommodate an ageing workforce.
The health and dynamism of older workers could become an issue so HR departments may need to take action such as strengthening the occupational health function and increasing flexible working arrangements to allow older staff to work part-time or from home.
In manual trades, I can see problems arising, but for higher-end, knowledge-based workers age is no handicap as they have a lot of experience to offer. The new savings scheme, which is now to be known as a personal accounts scheme after being proposed as the National Pension Saving Scheme by Lord Turner last year, is as near compulsory as is possible through auto-enrolment.
When employees join a company they will be enrolled into a personal accounts scheme unless they make an active decision to opt out. The thinking is that people will not opt out in large numbers and it is a ring-fenced investment scheme managed on behalf of staff to run alongside occupational schemes and the National Insurance contribution system.
The details have yet to be worked out but the personal accounts scheme is a massive undertaking. These will have an investment function, an administrative role in collecting the money and record keeping, and, in time, a payments operation. For employers, the extra contributions will be phased in over a three-year period. Despite the soft approach, the burden of matching employee contributions will put employers in a moral hazard.
Unless there are good reasons to provide a more generous company pension scheme such as offering an incentive to recruit and retain scarce talent, some employers will want to scale down their defined contribution schemes. And will employers save on cutting back their level of contributions to existing pension schemes or close such schemes to new employees and replace these with the personal accounts scheme?
The introduction of personal accounts could be fraught with hazards. New technology will have to be built and employers’ payroll systems will need modification to make changes to their tax system to reflect new patterns of pension savings although this should not be a big problem.
High admin costs have always been the number one challenge to private pension savings schemes. The new system will bring in more pension savers, lower costs through government subsidy and offer greater transparency. I’m sure the government see this as a way of regulating the pensions industry by the back door.