Recent market conditions have seen a massive rise in transfer values that could mean an upturn in the number of people wanting to move out of defined benefit (DB) schemes, something that may be considered strange given their reputation as the gold standard. These once-common schemes promise to pay retirees an income related to their wage and the number of years of employment. They often come with generous perks such as inflation proofing or spouses’ benefits. The Pension Freedoms legislation changes which, combined with the increase in values, has opened up the transfer option for these schemes. Under the new rules there are a number of benefits for clients when it comes to transferring out that go beyond rates of guaranteed income. Many of these schemes are now in crisis, with inadequate funds to pay the promised pensions. This liability can be a crippling problem for the business, which has to prioritise its ailing pension fund ahead of other, vital investment in growth or future employees. This uncertainty undoubtedly poses a worry to our clients. Some schemes are offering members “irresistible” deals to leave, as they struggle to fund their future liabilities. Cash equivalent values based on a multiple of projected income in retirement have in many cases soared from 20 times to 30 times. An immediate consequence of the Brexit vote was that defined benefit schemes were sent further into the red. According to a leading pensions consultancy, the day after the vote the UK’s DB pension deficit rose from £820 billion to £900 billion. Circumstances would need to be highly unusual for an existing employee member to give up future accrual for the sake of cash. However, for Scheme members with deferred benefits and no longer employed by the host employer such a huge cash windfall could be very tempting. One individual with a £1.4 million valued fund (who transferred) was able to take tax-free cash, buy a flat outright for his only daughter and leave almost £1million invested in funds of his choice. High transfer values and the new pension freedoms mean individuals should at least explore the option to take control of their pension entitlements. If you have a final salary pension and wish to understand options specific to you, a qualified adviser is required. We will take into account your full financial circumstances, your attitude to risk and your lifestyle to help you plan the right decisions for the retirement you want.
So far over 50,000 large and medium sized employers have completed the process and with 1.8m smaller employers still to go between now and 2018 the biggest challenge has yet to come.
Despite having considerable in-house resources and being able to call on the services of expert advisers and consultants, the large companies that have ‘staged’ so far have mostly commented that it was not as easy as first thought.
Owners of smaller firms inevitably wear many hats and workplace pensions and auto enrolment can come low on the priority list. But like it or not auto enrolment cannot be ignored and leaving it to the last minute could result in poor choices being made. The rules say employers have a duty to ensure the best outcomes for their employees but this is wide-ranging and ill-defined.
Since AE was introduced in October 2012 The Pensions Regulator has issued 3,782 compliance notices for contravention of one or more employer duty provisions. Over 100 of these resulted in a fixed or escalating penalty ranging from £50 to £10,000.
Finding a suitable pension scheme is a daunting task and employers need to ensure appropriate expert help is consulted before making the decision, as what might appear to be a low cost, high convenience solution could come with a risk of far greater troubles and costs in the long run.
We’re now only 3 months away from the first huge influx of small businesses needing to comply with workplace pensions auto enrolment. So far over 30,000 of the largest employers have completed the process and five million employees have been enrolled into a qualifying pension arrangement over the first three years of a six year roll out.
This year around 45,000 firms will complete the exercise but the pace of auto enrolment is due to accelerate at unprecedented speeds at the start of next year. In 2016 in quarter 1 alone around 100,000 employers will have to comply and a further 350,000 during the remainder of 2016. The pressure will be on to find the most suitable provider, a challenge that so far has thwarted many organisations.
Whilst January 2016 may seem a while away, in many businesses we’ve found that one simple thing regardless of the size and type of the business needing to comply remains true. The earlier a business starts to prepare, the smoother the journey to the staging date and compliance with the automatic enrolment rules.
For larger businesses the journey was typically a 12 to 18 month one. For smaller employers the timescale we recommend that they start to prepare nine months prior to their staging date.If an employer has less time than this they can still comply but, in our experience, employers who don’t leave themselves enough time to truly understand how the new rules impact their business can find themselves in a situation where they struggle to get everything done by their staging date, or if they do, they find themselves in a position where decisions are hurried and choices are limited.
However, having sufficient time allows employers and their advisers to make thought through, informed decisions without rushing and decide on the best approach to comply with auto enrolment that best suits their circumstances. At this stage research will be key and typically will include which payroll supplier, what other software solutions to use and which pension provider will deliver the best outcome for the scheme members.
Broadly speaking business owners have two options in order to ensure they comply. They can wait until the last minute and take it as it comes or they can request at the earliest opportunity the formation of a project plan from their accountant or a pensions expert. By taking the pro-active route they can rest easy in the knowledge that their solution is ‘on order’ and focus on what they do best, manage their own business.
We now have more control, choice and responsibility over our retirement savings than ever before. But it is important to understand what this means at every step of retirement planning, from saving towards retirement, to taking an income and preserving what’s left for our families.
Freedom and Choice, the government response to previous consultation, is a game changer for defined contribution pension schemes and most personal pension plans. However the new rules do not and were never intended to impact on final salary or defined benefit arrangements. For members in defined contribution and personal pension schemes it will result in more choices at retirement. The new freedoms make pensions look more attractive and will hopefully encourage more of us to save as people envisage being able to use their savings when and for what they wish once they reach age 55. Moreover the new flexibilities move the emphasis on personal choice at retirement rather than during the savings or accumulation phase.
On the other hand the income tax structure and more generous death benefits counter-balance the impulse to take short-term gains by providing a strong reason for people to be more circumspect about how much they take out of their pension, especially if they need their income to last until they no longer need it.
The key changes in relation to accessibility can be broadly summed up in the following headlines:
- From age 55 an individual can take a tax free cash entitlement from their pension pot and/or income payments at any level.
- Any income taken will be taxed at the individual’s marginal rate of income tax
Essentially the new rules provide the opportunity for everyone to be able to draw on their pension however they please. Pension companies offering flexi-access will allow plan holders to take as much or as little as they want from their pension whenever they want and however they want to take it.
There are also significant changes on pension death benefits. Previously lump sum benefits on death were taxed at a massive 55% but this has now been scrapped. The new reforms remove tax charges on death benefits where the member dies before age 75, reduce tax charges payable on death benefits paid where the member dies after age 75 and provide the ability for non-dependent beneficiaries to take income from inherited pension funds.
So pensioners will be able to nominate anyone they like to receive any remaining pension funds, and those beneficiaries can in turn nominate further beneficiaries if the fund hasn’t been used up by the time of their death.
Freedom and choice indeed but with that comes increased personal responsibility and a need to ensure a full understanding of the new rules since the wrong decisions could prove costly.
In the past I’ve talked about pensions auto-enrolment as an opportunity to improve your success with staff engagement. In other words if auto-enrolment has to be done, and it does, then use it to your best advantage to get the most from your staff relations as a means of boosting productivity and profits.
There is an abundance of research which has proven beyond doubt that stress causes a significant loss of output in many businesses from the largest multinationals to the smallest of firms. Indeed some very recent research here in the UK identified that 23 per cent of staff surveyed had at some time called in absent due to a stress related condition. Moreover a closer analysis discovered financial worries as the largest single issue for almost a third.
The research identifies 46 per cent of people worry about their finances, which means every business has a financial stress problem.
Jo Adams, a North Scotland people management specialist said “the research is clear regarding the impact of financial stress. I believe, organisations are starting to recognise the benefits of improving financial awareness and giving staff tools to manage these issues can lead to improvements in absenteeism, engagement and of course, productivity”.
Financial well-being is usually described along the lines of ‘Being and feeling financially healthy and secure, today and for the future’. Easy to say but when were we ever taught the rudiments of achieving such a state? In 2013 it was announced that financial education was to form an official part of the English national curriculum, including lessons on the public finances. In Scotland the Curriculum for Excellence recognises the importance of building financial capability in all our young people. But how does that help those of us who have long departed the education system?
The good news is that Financial Well-being is topping the 2015 agenda for the UK’s leading Reward, HR and People leaders and the roll-out of auto-enrolment is a perfect opportunity for employers to make a positive impact on the provision of financial fitness services. Clearly there is a cost to each and every business but using the example of auto-enrolment and the mandatory employer contributions to a pension scheme we have a gilt edged opportunity to educate on the power of future financial independence.
By combining auto-enrolment with a financial well being strategy it is possible for organisations to engage with their staff on a regular basis to help them take much more control of their money and reach their financial goals. For many a generous auto-enrolment offering will go a long way after years of stagnant wages and by presenting the new pension funding requirements in a positive light we can take advantage of a golden opportunity to engage with our people.
So for all business owners it is crucial the pension design and implementation proposition chosen is capable therefore of transforming a financial headache into something that stimulates significant staff engagement and as a result delivers very real increases in productivity and profit.
The auto enrolment band wagon rolls on and the latest statistics tell us that so far there has been a favourable response from workforces nationwide. Opt out rates are much lower than predicted and clearly this is good news in relation to the Governments original intention in building a self supporting culture in retirement.
So all is well, or is it? Based on the fact much of the cost of promoting self-sufficiency in retirement has been landed on the employers’ doorstep it is not surprising the number of business owner firms planning far enough ahead remains still very disappointing. Recent surveys continue to demonstrate that many employers are burying their heads in the sand and hoping the issue will go away. A poll last month revealed that 49% of SMEs and micro-employers understand little or nothing about the pension changes with 67% having no idea even of their staging date.
Here at Calvert Financial Solutions we continue to progress clients to a position of safety at a cost that satisfies an agreed budget using all the phasing and postponement tools available where appropriate. It’s important now that we continue to adopt a pro-active stance in helping clients get to grips with the auto enrolment challenge.
On 21st July 2014 the Government gave a green light to the radical rewriting of the pension rule book. The Government response to the ‘Freedom and choice in pensions‘ consultation delivers on the Chancellor’s Budget promise of much more pension flexibility and provides further detail on some of the changes in store from next April. This promise of pension freedom is set to encourage more clients to look in earnest once again at pension planning as a key component of a robust long term financial plan.
We believe that we should provide our Clients with a level of service and support that creates immediate auto enrolment solutions for their business, whilst also providing a structure that will assist their future growth and development.
Based in Inverness, our regional strength tends to lie in North Scotland and the Highlands and Islands, although we have clients throughout the UK. Our locality has been a decisive factor for many of our client firms and this is reflected in the strength and delivery of our services and accessible design and implementation support functions.
For auto enrolment specifically what can you expect from CFS? By working closely with you and understanding your workforce and your needs we will:
- Deliver a communications plan for your workforce
- Assess your workforce and estimate costs for you the employer
- Select the right pension scheme for you and your workers
- Arrange employee presentations to enable your workforce to understand what will happen and when
- Arrange for a face to face appointment with employees and give individual advice
- Arrange regular reviews to ensure that you the employer remain within the legislation requirements and avoid large penalties from the PR
There are still many business owners asking me what the pensions Automatic Enrolment legislation means for them. So for those who need a whistle stop tour of the main headlines I have produced a FAQ below.
Back in 2006 the Department of Work and Pensions’ research estimated that around 7 million people were not saving enough for their retirement needs.
To increase private provision for low/medium earners the Pension Act 2008 introduced workplace pension reforms effective from October 2012. These pension reforms mean that, eventually, all employers will have to offer a qualifying workplace pension scheme to their workers and that all eligible workers must be automatically enrolled into the chosen scheme.
To understand what is required of employers here are the most frequently asked questions.
What is Auto Enrolment?
It’s the process where an eligible employee is automatically enrolled into their company’s qualifying pension scheme without any action on their part. Under new Government legislation, this is a legal requirement for all UK employers.
Why is Auto Enrolment happening?
A large number of the working population in the UK are not saving enough for retirement or taking advantage of private pension schemes that may be on offer. We are living longer and have an increasing proportion of people of retirement age compared to those of working age. Auto enrolment is a part of a Government initiative to increase private retirement savings.
When is it happening
Auto enrolment began in October 2012. However, to help businesses prepare for the administration changes and costs of auto enrolment, it has been introduced in stages. The larger employers started to auto enrol their employees in 2012 while medium to smaller employers are being phased in over the next 4 years. By February 2018, all employers will have enrolled their employees into a qualifying scheme.
Is everyone being enrolled into a workplace pension?
Employers will have to auto enrol any eligible employee. An eligible employee is anyone aged between 22 and state pension age whose earnings are over the income tax personal allowance (£9,440 a year from 2013/14). There are different rules for staff outside these age and earnings ranges and employers will be required to ‘assess’ the whole workforce and know how and when to act in every circumstance.
How much will have to be paid into the qualifying scheme?
The total minimum contribution will eventually be 8% with the employer having to contribute at least 3%. The difference between what the employer must pay and the overall minimum contribution is made up by the employee plus some tax relief from the Government.
Where will the contributions be invested?
The scheme will need to have a default investment fund available as agreed with the pension provider. This will be used to auto enrol new employees and for those who don’t want to make an alternative investment choice if the scheme offers one.
What if the employer already offer a scheme?
The employer may already offer employees a scheme, but it will need to meet certain criteria to be suitable for auto enrolment. All types of schemes must have the means to auto enrol eligible employees. If the employer doesn’t currently offer any scheme or their current scheme does not meet the criteria then they can either change the current scheme to fit the criteria or set up a new scheme.
The DWP published a progress report in December 2013 on the success or otherwise of auto enrolment. It announced that so far over 2 million individuals had been auto enrolled with less than 10% deciding to opt-out – workers can decide whether to remain in the pension scheme or not. The data also suggests that many small to medium sized businesses are still not certain of their roles and responsibilities and are at risk of non-compliance. Since it can take up to 18 months to design and implement an effective auto enrolment pension solution business owners need to take action early.
This year some 38,000 businesses are scheduled to automatically enrol their staff into a qualifying workplace pension scheme (QWPS) with 32,000 employing between 50 and 250 employees set to go from the beginning of the new fiscal year in April 2014.
Much has been said in connection with the low opt out rates experienced by larger employers to date – workers are permitted to back out of the scheme if they wish within the first month – but is this really such a surprise?
Only just a few years ago research showed that for the majority of employees saving for retirement was less of a priority than holidays, home improvements, going out, saving for a rainy day, the car, shoes and clothes. A recent survey undertaken on behalf of NEST (National Employers Savings Trust) suggests that auto enrolment activity has pushed pensions right up the list of consumers’ priorities. Is this because during recessionary times people feel more vulnerable for their future? Or is it just that we all understand that life is short and we need a plan.
Whatever the reason it is clear that the idea of saving for a future income including a pension now resonates with the UK public more than ever. The recent Budget announced massive reforms around pension accessibility which will only accelerate this shift of opinion.
The responsibility of setting in place qualifying workplace pension schemes has been landed on employers and some cracks are beginning to appear. The Pensions Regulator (TPR) investigated more than 500 suspected breaches of auto-enrolment (AE) legislation in just 6 months and 590 in total since October 2012.
As a result the regulator took action under its compliance and enforcement policy in 134 instances to 29 January 2014. The most serious of the compliance notices issued related to companies who had failed to establish a scheme and complete registration.
In addition, TPR delivered 28 instructions to companies at risk of non-compliance prior to January 2014 and 101 warning letters were issued for minor alleged record keeping or staff communication breaches.
The latest figures come as a concern rises over employers failing to meet their AE duties due to the anticipated industry capacity crunch in the coming months.