UK pension shake-up a warning to small firms

Business Correspondent/Personal Finance Editor

Monday 8 October 2012

THE We're In campaign to promote workplace pensions, launched alongside compulsory enrolment for employees of the UK's largest firms, is a warning shot to even the tiniest firms in Scotland, an expert has warned.

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Simon Bain

Smaller companies have up to three years before they have to sign up, but any employee over the age of 22 earning more than £8105 a year must be enrolled now, or opt out.

Stuart Faloon, who heads up Mercer's practice in Scotland, said: "Now that we are getting closer to the deadlines, companies are starting to wake up.

"The mid-market is a year away and smaller companies the year after that, while in the smallest ones there is an element of thinking they are exempt, but nobody is exempt from this except the very low-paid, the very young and the very old."Already, some big employers and local authorities have begun their own education campaigns to encourage staff not to opt out, though Mr Faloon admitted "inevitably some companies will want people to opt out because then they don't have to pay contributions".He said: "Hopefully as employers educate their workforces, it will bring pensions centre stage, cascade out into the wider community, and pensions will become a positive topic of conversation after all the negative coverage of the last couple of years."Mercer, one of the bastions of final-salary pension consultancy, has developed a new workplace service and still employs 250 in Glasgow and 50 in Edinburgh. Mr Faloon said: "We have partnered with several insurance companies who provide the platform and the underlying products. We overlay that with governance, liaising with the employers and educating the scheme members."He cited Department for Work and Pensions (DWP) research that shows middle and higher earners are more at risk from a poverty-stricken retirement than low earners. He added: "People on low levels are going to be pretty much covered by the universal pension, but as you go up the income spectrum, people have increasingly inadequate pension savings."The universal pension, however, promised at £140 a week from April 2016, is back in question after David Cameron cast doubt on it last month. Without it, low earners risk paying into a pension only to lose means-tested benefits on retirement, having gained nothing. Mr Faloon said: "The Pensions Commission back in 2005 said the two reforms had to be brought in together. As long as there is uncertainty about how the state system is going to work there will be uncertainty about the value of people on low incomes being auto-enrolled."Tom McPhail, pensions expert at brokers Hargreaves Lansdown, said DWP research also shows 31% of employers will absorb the cost of auto-enrolment, but 18% will recoup it through lower wage increases, 16% will restructure the workforce, and 15% will increase prices. He questioned the DWP's 2009 findings that 90% of firms currently paying at least 3% of salary into an employee's pension will maintain or increase their contributions. Mr McPhail said: "In today's climate that looks wildly optimistic. From the employers I have spoken to, some will undoubtedly level down their contributions, and many will introduce a two-tier pension system with lower contributions for the new members, or for new employees, or for lower-grade employees."Nest, the national not-for-profit scheme, calculates that someone on £20,000 paying in 8% of salary over 20 years (including 3% from the employer and 1% tax relief) will have a pension pot worth £47,000 in today's money, which equates to a tax-free lump sum on retirement of £11,700 and an annual income for the rest of their life of £1600. Add to that the present basic state pension of just under £6000 a year and that would mean retirement on one-third of working income. Mr McPhail added: "The auto-enrolment programme is just the start of the solution. We're going to need to spend the next 20 years ratcheting up the contribution rates – an 8% contribution rate will do little more than lift members out of welfare."David Heaton, of accountants Baker Tilly, said: "Small employers with fewer than 50 employees won't be forced into auto-enrolment until August 2015 at the earliest. But that doesn't mean that they should do nothing, and they need to start planning now."It is starting out unambitiously, with contributions of only 2% initially, rising to 8% (with the employer chipping in at least 3%) in five or six years' time. But remember Australia started out with a low contribution rate for its compulsory private superannuation schemes which has risen and will soon be 12%. "In Germany, the rate is higher still, but people know that you get nothing worthwhile without paying for it."

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UK pension shake-up a warning to small firms

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