After being in the pipeline for a number of years, the Pensions Act 2008 is now looming large, with the legislation set to come into effect for the first tranche of organisations next year. This will see the introduction of automatic enrolment to a qualifying pension scheme, compulsory minimum employer and employee contributions, and the national employment savings trust (Nest) as an alternative to employer-sponsored pension schemes for some staff.
During the countdown to the pension reforms taking effect, there has been much speculation that the introduction of auto-enrolment and compulsory contributions would lead to increased costs for employers. With just over a year to go, almost two-thirds (64%) of respondents say that this will be the case.
Employers that are not expecting increased costs may already offer a scheme with good take-up rates and contributions that are above the new minimum levels. Alternatively, they may have got a head start on complying with the reforms in order to absorb any increase in cost over a longer period.
When it comes to dealing with increased costs, the most popular method among respondents is to absorb these within other areas of the business cited by 42%. This is followed by employers’ intention to introduce a salary sacrifice arrangement around pension contributions. This results in national insurance (NI) savings for the employer, which can be ploughed back into the scheme to help fund additional pension contributions. Just under a quarter of employers plan to use this method to deal with reform-related cost increases.
Encouragingly, just 4% of respondents say they will reduce current employer pension contributions for all staff. It had been feared that a number of employers would level contributions down to the minimum level to mitigate the increased costs associated with higher pension scheme membership caused by auto-enrolment.
On 6 April 2011, the tax relief on high-earners’ pension pots was reduced to one-fifth of its former size. Previously, employees could contribute £255,000 a year to their pension tax free, but this has now been cut to £50,000 a year. The limit applies to contributions from both employer and employee, and staff must pay tax on any excess.
According to estimates by HM Treasury before the new limit came into force, it was thought this move would affect 100,000 pension savers, 80% of whom earned an annual salary of more than £100,000. However, employers should not overlook lower earners because long-serving employees who belong to a defined benefit (DB) pension scheme could also be caught by the new rules.
From April 2012, the government is also cutting the tax-free amount people can save into a pension over their lifetime from £1.8 million to £1.5 million. Just under half of respondents say no employees in their organisation will be affected by these changes.
Where employers do have affected staff and have decided what benefits to offer to help them deal with the changes, cash-back alternatives are the most popular option. This is followed by a defined contribution alternative to a defined benefit pension arrangement and non-financial benefits as an alternative to pension contributions.
Read more articles from the Employee Benefits/Alexander Forbes Benefits Research 2011