There is only one way to guarantee a comfortable retirement: have an enormous amount of money. Unfortunately, that option isn’t open to most people so they turn to pensions. But for those who need to save diligently, both private pension arrangements and company pension schemes can be problematic. With a defined benefit (DB) scheme there is often too much risk loaded onto the employer and DB schemes can build up vast deficits if, as now, economic and financial factors go against them. With a defined contribution (DC) scheme there may be too much risk placed on the saver, leaving them with a pitiful retirement income.
If pensions are not fit for purpose and lots of people don’t even bother trying to save for their retirement, that’s bad news for everyone. So the pensions industry, the Pensions Regulator and the government are all trying to improve the situation. Any accountant, whether advising individual clients or businesses (for which the accountant may also be running payroll), or working in-house for an organisation with a pension scheme, needs to keep up to date with any resulting legislative change.
Employers should also review flexible benefits packages to ensure that joining a pension scheme is always seen as a right rather than a choice
The most important recent change is the introduction of auto-enrolment (AE). This compels all employers to automatically enrol staff in a pension scheme, if they are not in one already, once earnings reach a certain level. If there is no existing scheme, or an existing scheme is unsuitable, employers will need to set up a new scheme, or use an external pension provider or the National Employment Savings Trust (NEST).
Auto-enrolment is being introduced in stages over the next two years, with around 600 organisations with 120,000 or more staff kicking things off in October 2012 (or any time from July if they prefer). All eligible jobholders (anyone aged between 22 and state pension age earning over £7,475) will be auto-enrolled unless they opt out. Non-eligible jobholders (aged between 16 and 75 earning between £5,715 and £7,475) have the right to opt in; as do what’s termed entitled workers (those aged 16-75, earning under £5,715). Agency and temporary workers may be eligible, but the agency may have responsibility for enrolling them, depending on who is responsbile for paying them.
The minimum contribution, including employer and employee contributions and tax relief, will rise from 2% to 8% before 2018, according to current government proposals. At present the plan is for contributions to reach 5% in 2017 and 8% in 2018. Within that, minimum employer contributions will rise from 1% this year to 2% and then 3% in 2017 and 2018. Auto-enrolment processes will be repeated every three years for eligible staff who opt out.
Facing the challenge
In May research by Aviva suggested that about a third of workers who are auto-enrolled will opt out. What is clear is that AE will be a challenge for employers. Some will need a year or more to alter pensions and payroll systems and processes. In some cases it will make practical and financial sense to auto-enrol staff in an existing scheme. Of 820 employers surveyed by Mercer in March 2012, 69% said they planned to do this. But some schemes may not be suitable for AE, while some providers may only cater for lower paid workers on the condition they can charge higher fees.
So employers may find it easier to set up a new scheme. "If they do that they will need to think about communications, to make sure lower paid employees don’t think they’re being treated unfairly," warns Liz Cole, manager, company law, pensions and insolvency at ICAEW. Employers should also review flexible benefits packages to ensure that joining a pension scheme is always seen as a right rather than a choice. Cole suspects these difficulties may mean that employers with existing pension schemes will actually take longer to prepare for AE than those that do not.
Whether or not setting up a new scheme is necessary, AE is certainly going to cost money, so many employers will want to find savings elsewhere. There has been some concern that some employers might cut contributions to existing scheme members’ pensions, but this seems unlikely (it would look awful, apart from anything else). There are other ways to reduce costs in any case: reviewing administration or outsourcing arrangements for existing schemes; adjusting fees levied on members; or offering options such as salary exchange.
Employers will certainly need to factor AE into any other plans they might have around altering pension provision to employees, such as merging existing schemes or introducing flexible benefits, notes Mark Baker, senior associate at legal firm Pinsent Masons. He stresses the importance of someone at a company, possibly senior members of the finance team, taking responsibility for managing the transition to AE. "That’s difficult, because it’s partly the finance department’s concern, partly HR, and partly payroll," he says. "It will require coordination."
ICAEW members working in-house, such as Daniel Quint, finance director at recruitment company Robert Walters, are grappling with these issues. Robert Walters has 600 employees, some of whom will be auto-enrolled because they have not joined the company’s existing DC scheme, but it is also responsible for auto-enrolling around 5,000 individuals working as temporary contractors for other organisations. "There’s been lots of rewriting and changes to processes in terms of new joiners, which is an extra administrative burden and an increase in cost," says Quint. But he is confident the company will be ready when its AE staging date arrives next spring.
The National Trust will be starting to deal with AE at the same time. It already has a final salary scheme – now closed to new entrants – but with around 1,500 active members, and a Stakeholder DC scheme with about 2,000 members. Altogether the Trust has about 5,000 regular staff, but also about the same number of seasonal or temporary employees, some of whom will trigger AE with their monthly earnings. At the moment the Trust is planning to set up a new scheme to cater for AE, providing minimum contributions. Everyone who is automatically enrolled will still have the opportunity to join the DC scheme.
Accountants need to decide where they want to get involved. They may want to link up with specialist firms giving payroll advice or wider auto-enrolment advice
A new payroll system that was already scheduled to be introduced will need to manage the transition. Uncertainty over what seasonal staff will do is a key concern. "We just don’t know how they will respond," says Andy Copestake, director of finance at the Trust. "We’ve just got to run with it for a while and see what the opt-out rate is. We want people to have pensions and to join the scheme, but it’s got to be affordable for the Trust."
AE could also have significant implications for accountants in practice. "A lot of accountants provide general management advice to companies, particularly impacting on payroll," says Steve Wood, senior consultant at financial advisor Helm Godfrey. "Accountants need to decide where they want to get involved. They may want to link up with specialist firms giving payroll advice or wider auto-enrolment advice."
Accountants running payroll for clients (and for their own staff) will have to ensure systems can cope with AE. Software firms are trying to develop patches or upgrades to systems to help users cope. Some service providers are developing extra services, such as Oracle HR & Payroll specialist Hitachi Consulting, which is developing an offering that will help end users cope with fluctuations caused by seasonal employment.
Small business concerns
Mike Cherry, national policy chairman at the Federation of Small Businesses (FSB), says few small businesses are already giving AE a lot thought. "At the moment their main focus is keeping the business going," he says. "We have tried to raise awareness so that people know this is coming. We are also calling on government to carry out an impact analysis, to make sure any bugs arising from large and medium-sized businesses going through [AE] are ironed out before small businesses have to cope with it."
There have been complaints from companies of all sizes and from within the pensions industry about the quality and consistency of the information being provided by the Pensions Regulator and the DWP in relation to AE. The regulator has now released a new online tool designed to help employers work out whether their scheme meets the criteria for AE; and published a draft features document setting out questions employers should ask advisors or product providers when selecting a scheme to use for AE, or assessing an existing scheme.
From 4 November the annual allowance for pensions is reduced to £50,000, while the lifetime allowance falls to £1.5m on 5 December for everyone retiring after that date. Accountants advising individual clients will need to ensure they understand the tax implications of exceeding those limits, something which could easily happen if someone has several different pensions savings pots, or if they take early retirement due to ill health.
It can be an issue for those working on in-house company schemes too. "We’ve had to respond to the £50,000 cap," says the National Trust’s Copestake. "It’s quite easy for people to trigger that if they get a big pay increase and they’re in our final salary scheme."
AE has had an impact here too. Some individuals who already held more than the lifetime allowance in a pensions pot when the first cap was introduced in 2006 may have registered at the time for fixed protection to safeguard those funds. This is permitted on condition that those individuals opt out of all subsequent pensions provision, so accountants may need to make individuals understand that they must opt out of any AE arrangements put in place by any organisation for which they work.
For example, someone could have paid directorships with more than one company and it is perfectly possible that if they are paid for those roles through PAYE they may be auto-enrolled.
Another change of which accountants should be aware is the end of contracting out for DC scheme members. As of April people no longer receive the contracting out rebate and now build up State Second (S2P) benefits instead.
This may not be the best option for some individuals. The good news for them is there’s no longer a legal requirement to keep any funds built up from contracted-out rebates separate from additional pension funds, meaning more flexibility in the way people manage their funds.
Accountants and their clients (corporate and individual) also need to keep an eye on the rising statutory retirement age and how this is treated in law. In one recent case (Seldon v Clarkson Wright & Jakes), a 65-year-old partner at a law firm claimed the firm’s policy of retiring partners at 65 amounted to age discrimination. The Employment Tribunal rejected his claim and subsequent appeals to the Supreme Court failed on the grounds that the policy was a means of achieving aims relating to opportunities within the firm. The Tribunal is now considering how to clarify the test for justifying direct age discrimination.
Another Supreme Court judgment, in Bridge Trustees vs Holdsworth and another, may also have important implications for the definition of money purchase benefits – usually seen in a DC scheme – in pensions law. The Supreme Court has ruled that even if benefits were subject to a guarantee while being accrued they should be considered to be money purchase benefits.
Also if schemes used money purchase rights to provide pensions from the scheme itself rather than annuities from an insurer the pension should be considered money purchase. The problem is, this means some schemes can now be regarded as providing money purchase benefits under current legislation even if funding deficits can arise. This may make it necessary to change legislation relating to scheme funding, employer debt, government support for schemes in difficulty and the distribution of a scheme’s assets if it is wound up. In a statement issued in July 2011 the DWP said it was considering the implications of the judgement. It intends to address these anomalies through retrospective legislation, to protect scheme members’ rights and ensure compliance with EU law.
The right tools
In response to the introduction of auto-enrolment, financial advice website Money on Toast has launched a free online planning tool to help companies and accountants assess the cost and impact of AE on their pension plans.
Money on Toast claims the tool can also outline what companies need to do to comply with the new legislation. The intelligent guidance software is designed to outline the impending changes; state whether a company is already compliant; calculate the cost to the company of any necessary alteration to its pension scheme; and offer tips on making wage bill savings. If it works, it could save businesses fines of up to £50,000.