Are Scottish firms ready for pensions revolution? Staff at smaller firms face long wait for contribution Are Scottish firms ready for pensions revolution?

Saturday 22 September 2012

The pensions crisis surfaced in TV commercial breaks this week as the Government's "We're All In" advertising campaign spread its message.

publicity drive: A Government TV advertising campaign for automatic pension enrolment will continue through September and October.

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HELEN PRIDHAM

It is aimed at raising awareness of the new regime of automatic enrolment into a pension at work, which is being rolled out at the start of next month.

It coincided with official figures showing that membership of private sector workplace pension schemes has fallen to its lowest level since 1953, and also with the emergence of tensions within the Coalition over the UK Government's commitment to a new flat-rate state pension, intended to make private pension saving more worthwhile for the lower paid.

Questions are already being raised about the effectiveness of the new pension regime, including its contribution levels and slow roll-out, and if some workers will be better off opting out of enrolment if the state pension reforms do not go ahead.Steve Bee, of Paradigm Pensions, warns that the parallel reforms are critical. "One thing the Government has got right is that it is introducing a flat-rate state pension, and getting rid of pensions means- testing so that everything you save in future will help to boost your retirement income. Modest savers will no longer be penalised." Dr Ros Altmann, director-general of Saga, says: "If the state pension reforms do not go ahead, it will be disingenuous for people to promote pension scheme membership to low earners at risk of losing their private pension in retirement means-tests." For many employees it will be beneficial. But Mr Bee has doubts about the We're All In slogan. He says: "A better message may have been that every £1 you invest in these pensions will effectively be doubled to £2, thanks to your employer's contribution, which is not a bad return." Nevertheless, he and other pension experts agree that contributions need to be six to 10 times higher than the scheme's initial minimum total contribution of 2% of salary, to provide workers with a decent retirement income. The amount of pension a 2% contribution will produce would be very modest. Ian Naismith, head of pensions market development at Scottish Widows, says: "It would probably be equivalent to about 5% of your salary when you retire."Contributions under auto-enrolment will eventually reach 8% in 2018, but even at this level they will be insufficient to achieve an adequate pension. Mr Naismith says: "We recommend contributions of 12% for a decent pension."Mr Bee points out a good final salary pension scheme producing a pension of two-thirds final salary has historically required total contributions from employers and employees of some 23% of earnings.However, the Government has had to tread carefully, says Laith Khalaf, pension manager at advisers Hargreaves Lansdown.He points out: "The CBI would have thrown their toys out of the pram if employers had been told to contribute more from the start, and there would have also been a higher likelihood of staff saying they couldn't afford it if their deductions were too high." As it is, many Scottish employers are still unprepared, and more than half of Scottish workers are completely unaware a new system of automatic pension enrolment is being introduced. A recently published survey by the Pensions Regulator found that Scotland is the least prepared region in the UK for the new regime, with 45% of employers reported to be unaware of it and only 39% believing that it's a good idea. Half of Scottish employers said they were planning to leave preparations for the scheme until the last minute.These responses do not bode well for the future, says Chris Faulkner, senior manager at Grant Thornton's employee benefits consultancy. "The lack of enthusiasm among Scottish employers is concerning," he says. "A lot of employers are not as ready as they should be." Despite the long lead-time granted to smaller companies to introduce the system, up to five years, Mr Faulkner says Scottish companies will get caught out if they leave it to the last minute.He explains: "Employers need to start thinking about it at least 12 to 18 months in advance. There are various factors they need to consider – such as which workers they will need to enrol and how they are going to budget to meet their contributions. One of the biggest problems is that if employers bring in the scheme in a rush and tell staff they are only doing it because they have to, rather than because it is good for them, it will also impact on staff reactions."Another consequence of a last-minute decision is that employers may not choose the best value pension provider for their staff. There are low-cost schemes available from NEST (the National Employment Savings Trust), the People's Pension, and Danish provider NOW. But some employers may choose to use existing schemes which are more expensive. Mr Bee says: "One of the flaws with auto-enrolment is that there is no cap on pension charges. If people find they are being enrolled into a higher- charging pension, it may be an inducement for them to opt out."Another problem with the new scheme is that despite the We're All In slogan, many people are not covered by this push to encourage more private pension provision. Low-paid part-time staff earning less than £8105 are excluded, as are the growing army of self-employed workers.From next month, it will be compulsory for large employers to enrol everyone over 22 years of age and earning more than £8105 into a workplace pension and pay a contribution on their behalf.Initially, employers will have to pay 1% of an employee's qualifying earnings into a pension. Employees' own contributions will bring the total to 2%. Many employers will not be affected immediately because pension auto-enrolment is being phased in gradually. Only large employers will have to introduce it in October.Medium-sized employers with 50 to 249 staff will have to start auto-enrolment between April 2014 and April 2015. Smaller employers will come last. It means that employees of the smallest firms must wait nearly five years before their employers start paying into a pension scheme for them.

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Are Scottish firms ready for pensions revolution? Staff at smaller firms face long wait for contribution Are Scottish firms ready for pensions revolution?

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