Employers appear to be getting to grips with the requirements of the pension reforms and have been considering their options and possible cost increases
After many years in the pipeline, the Pensions Act 2008 will finally begin to take effect from October this year. For some organisations, compliance is already a reality, with some having opted to bring their staging date forward to last month. The legislation will introduce compulsory minimum employer and employee contributions and the requirement for employers to auto-enrol all staff into a qualifying pension scheme for the first time.
As the reforms draw closer, employers appear to be getting to grips with their new obligations, and are considering how they will manage any necessary preparations for auto-enrolment. Most seem to have a plan in mind, with three-quarters of respondents having calculated the cost of compliance, 72% having put a project plan in place and 69% having planned their budget. Most employers seem keen to use their existing pensions provision to meet the reforms’ requirements, with 85% saying they intend to do so.
Just 11% say they will use the national employment savings trust (Nest). The proportion of respondents that intend to use Nest has fluctuated over the years. Back in 2008, just 3% of respondents said they intended to use Nest’s forerunner, personal accounts, for all staff to comply with the reforms. Yet, last year, 50% said they intended to off er Nest in some capacity. It may be that the competitors to Nest that have entered the market over the past year mean employers now have more options to choose from.
More employers may also have completed their preparations and planning ahead of their staging date, so have now
clearly identified the most appropriate option for their organisation. In some cases, this may differ from their initial expectations.
Employers also have the option to certify that their pension scheme meets certain criteria to simplify the administration process. Certification will exempt employers from having to ensure that the value of an employee’s defined contribution (DC) contributions is at least equal to the statutory minimum pension contribution level over a 12-month period. Just under half (48%) of respondents to this year’s research say they intend to use these certification rules.
Increased costs will be an inevitable result of the reforms for a number of organisations, particularly those that currently have low pension scheme membership and/or which provide employer contributions below the minimum
level required under the reforms. Just under one-third (32%) of respondents expect their pension costs to rise by between 1% and 9%. However, 15% said they did not expect any rise.
Despite speculation about the true impact of increased costs, the percentage of respondents that say they will maintain existing employer contribution levels where these are above the required minimum (which will eventually reach 3%) in order to be seen as an employer of choice has risen. Back in 2008, 37% of respondents planned to do so. This figure rose to 54% by 2010 and now stands at 80%.
The percentage of employers planning to introduce salary sacrifice arrangements around pension contributions has also risen over the years. Back in 2008, just 8% said they would do so, which compares with 26% in 2009, 22% in 2010 and 39% this year.
Although, under the reforms, employers will have to auto-enrol all eligible employees into a qualifying workplace pension scheme, employees can subsequently choose to opt out of the scheme if they wish. They will then be re-enrolled every three years.
Just under one-fifth (18%) of respondents predict that between 10% and 19% of their employees will opt out post-auto-enrolment. A further 13% believe 20-29% will opt out, while 20% are hedging their bets on likely opt-out
figures. Just 6% expect no employees to opt out of their organisation’s pension provision.
To prevent employers encouraging staff to opt out in order to save on contribution costs, laws preventing inducements to opt out came into effect on 1 July. Employers that are perceived to be in breach of these rules could face a hefty financial penalty.