Pensions World

The 2012 pension reforms may still leave the UK a nation of pauper pensioners, says editor, Stephanie Hawthorne

It is one year to the start of the biggest pension reforms since the introduction of the Old Age Pension in 1908. For the first time, in a phased process beginning in October 2012, every UK employer, even of a nanny, will have to auto-enrol their staff into a qualifying pension scheme.

The pensions cognoscenti are fired up about the new reforms, with surveys from the Association of Consulting Actuaries (ACA) and the Chartered Institute of Personnel Development (CIPD) landing on my desk, not to mention dozens of press releases from the major consultants.

Sadly, all this buzz is not making an impact on the world of work, with distinctly unenthusiastic if not apathetic employers. Indeed, they are dragging their feet: only 7% of larger firms have made auto-enrolment plans according to Standard Life. Even worse, the ACA says a third of larger employers are looking to decrease their spend on workplace pensions at the very time when they need to be considering the possibility of a higher spend.

Only just over a quarter of employers have budgeted for the cost of auto-enrolment, with larger employers expecting between 12–17% of employees to opt out of the workplace pensions after being auto-enrolled. Smaller employers are budgeting on between 33–39% of employees deciding to opt out.

As ACA chairman, Stuart Southall, says: “There is a clear danger of more levelling down. With contribution rates into many schemes failing to keep pace with the pension costs of longer life spans, and with employers expecting, and in some cases relying upon, high anticipated levels of pension opting out for budgetary purposes to keep their auto-enrolment costs down, warning bells are ringing.”

Employers’ duties to their workforce should not cease when their staff retire. It would be a shocking indictment of British industry if after many years’ work all that faced the typical UK worker was poverty in retirement.

Pensions before holidays

Sadly, even before the new reforms are in place, 21% of employers report that member opt outs from pension schemes have increased. While everyone’s income is under pressure, do employers educate their workers sufficiently about pension priorities? Pensions should come before foreign holidays and Sky television.

Too many employers took the opportunity, when replacing their defined benefit (DB) pensions with defined contribution (DC) plans, of imposing what is in effect a pay cut. The statistics are telling. Average combined employer and employee contributions to DB schemes are 27% of earnings. This is double the average combined employer and employee DC contributions which range from 7.5% and 12.5% (source: ACA).

DC need not necessarily always be worse than DB, but low contribution rates will mean the halcyon days of employees happily retiring on two thirds pay are gone forever. By 2017 minimum contributions must be 8% of employee earnings, with a minimum of 3% from the employer plus 4% from the employee and 1% by way of tax relief –
a wholly inadequate sum.

All the signs are that the great bulk of British employers will contribute the minimum they can get away with – 3% –while employees will be deluded into thinking their pension is sorted at 8% – far from the truth.

The only way to finance retirement, when more than 10m people in the UK alive today can expect to live to see their 100th birthday, is a combined employer and employee contribution of 20% from the day an employee enters the workplace.

I hope there will come a time again when employers compete with each other to offer the best retirement provision rather than “race to the bottom”, as there can be no better recruitment and retention tool than a good pension.