With many employers reeling from the compliance deadline of A-Day, Nick Golding says May’s pensions white paper must get proactive treatment
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It’s been a tough year so far for pension managers. If pensions simplification changes in April were not enough to keep them occupied, the white paper on pensions reform has certainly given the pensions industry plenty to think about. One of the key proposals of the white paper, which was published in May, was the concept of auto-enrolment. This would involve giving all employees the opportunity to join either a company scheme or the state system of personal accounts, with employers contributing at least 3% of employee income.
This decision may well force employers to re-think any changes they were planning to make to their scheme, as auto-enrolment could make pensions more expensive to run due to increased participation. Jeremy Ward, head of pensions marketing at Friends Provident, explains: "If it is a good pension scheme, the organisation will have to decide whether it can afford to roll it out to all employees. If the current take-up is 80%, that may be ok, but if it is 25%, auto-enrolment [for all staff over 22 years it might] cause a big jump in take up."
Some organisations will find the new proposals more difficult to adapt to than others. How straightforward they find it to be will typically depend on a organisation’s attitude towards pensions, because those doing it on the cheap may suffer the most. "The proposals [will affect those] organisations which have a fairly good scheme but only let people join when they find out about it," says Ward. New measures can take a while to imbed in organisations. Many, for example, are still suffering from an A-day hangover and are struggling to get to grips with certain elements of the new regime. The problems seem to lie with employers not being proactive enough in actually initiating the changes that A-day introduced.
Jane Beverley, senior technical consultant at actuary firm Punter Southall, explains: "A lot of employers know about the changes but are not actually making the crucial changes to their own schemes so members can take advantage. It’s just not top of their agenda." One area where employers appear to be slow on the uptake when it comes to A-day changes is tax-free cash. Members can now theoretically withdraw a tax-free lump sum of 25% on retirement, whereas this was previously only available to a select few staff. "This is an initiative that will not happen automatically. Employers need to action it and though they may be aware of the change in rules, they are not altering their scheme rules to allow employees to take part," explains Beverley.
Rules around flexible retirement may also be causing problems, and many have not yet dealt with this. Previously, employees were eligible to take their pension on retirement, yet the new rules allow schemes to be amended so staff can continue working and take some pension benefits after reaching retirement age. This is an area that many employers have still to get to grips with. And with age discrimination rules due to come into effect in October, it is vital that they do so. "It might be seen as indirect discrimination by an employment tribunal if employers do not change [scheme] rules to permit flexible retirement, because it might be seen to impact on employees of a particular age-group more than others. "
For instance, employees in their fifties might be [considered] more likely to want to draw their pension and then carry on working than employees in their late sixties," explains Beverley. The new rules are set to help Tesco, where its pensions team have made the necessary changes to scheme rules to ensure that older employees are able to take advantage of flexible retirement. Jeff Webley, communications executive in pensions, explains: "We have been proactive around this because we have many employees [aged] around 60 and 65 years who collect their pension and then move elsewhere, so it is a positive step for us because we can keep staff that we know."