Catherine Cunningham, policy adviser at the National Association of Pension Funds:
Good news and pensions rarely mix. But April’s publication of the government’s long-awaited thoughts on state pension reform is something to celebrate.
The green paper outlines two options for simplifying the UK’s complex state pension system to create a new, clearer foundation for retirement. The current system is a mess: even pension experts struggle to work out what their state pension will be.
We have long argued for a simpler, more generous state pension. Combining the basic state pension and state second pension will help people save for retirement with confidence because they will know their savings will not be eroded by means-tested benefits.
Staff will be able to save into a workplace pension with much more certainty about how things will add up in retirement.
Employers will be able to provide good-quality workplace pensions, while knowing their employees value the contributions they make. Together with auto-enrolment, a new state pension will have a huge impact on the way employees and employers value pensions.
But the new system will not be without problems for employers. There will be complex transitional issues, especially for final salary schemes that contracted out of the state second pension. Many final salary schemes will try to change their accrual rate to offset the hit on fund cash flow from the loss of the rebate.
We have urged the government to ensure contracting-in arrangements will be made as simple as possible for schemes and employers.
Ultimately, a new state pension is a big step forward. It will offer everyone, including staff saving in final salary schemes, a clearer and stronger foundation for retirement saving.
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Simon Belton, group pensions manager at Punch Taverns:
Simplification of the current state pension scheme has to be welcomed with open arms by both employees and employers alike. Confusion is often the only constant theme for employees when trying to assess their financial future, as the next phase of their life approaches.
Too often, employers are told that their pension schemes need to be clearer, simpler to understand and transparent to encourage employees to participate.
Employers invest significant time and resources in making sure this message is delivered, but state pensions are often excluded because of the complexities involved.
Indeed, state benefits are something employees often view as difficult to place a tangible value upon, due to the complexity and multiple messages they receive when assessing their retirement benefits.
We, at Punch Taverns, will welcome the opportunity to support our existing pensions messaging with a clear explanation of the tangible benefits of the state pension scheme, so our employees can factor it into their retirement planning.
The moves to simplify the actual value of this and demonstrate to employees that the state pension works as part of a portfolio of retirement benefits means that confusion should no longer be the word our employees associate with their state pension entitlement.
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Peter McDonald, pensions partner at PricewaterhouseCoopers:
A single-tier flat state pension should make life easier for most employers. Rather than looking at pensions in isolation, organisations are increasingly focusing on the total retirement wealth of staff. Knowing workers are guaranteed a set amount, regardless of whether they have a career break, for instance, gives organisations a clear starting point from which to plan additional retirement provision. With people’s increasingly varied career and retirement patterns, this predictability is helpful.
The proposals should also make the forthcoming requirements to automatically enrol employees into a pension scheme more viable. Some employers had been expecting high opt-out rates from workers who feared losing their means-tested pension benefits. Other organisations were concerned that they might be criticised at a later stage by employees who were no longer entitled to these benefits. With the end of means-testing, this is no longer an issue.
For those employers with defined benefit (DB) schemes, the end of contracting out will bring additional costs.
Efforts to offset these are likely to prove tricky, so the state pension changes could provide another reason for some employers to reconsider whether a DB scheme is the best option for them. But it is unlikely to be the main deciding factor.
The other big change planned for state pensions is linking retirement age to longevity, which provides protection to the government in the event that we all live significantly longer.
Similar protection for employers would be a very positive step. Certainly, the proposals give organisations much to think about regarding their workforce planning, their own retirement policies and practices.
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