Category: Corporate

Advisers welcome Govt auto-enrol simplification plans

Advisers have welcomed Government efforts to simplify automatic enrolment regulations for small businesses although concerns remain about the cost and complexity of complying with the rules.

Last week, the Department for Work and Pensions proposed a series of changes to auto-enrolment regulations designed to make the reforms less burdensome for small and medium-sized firms.

Firstly, the DWP says it wants to make it easier for employers to use existing payroll processes to check whether a worker is eligible for auto-enrolment.

It has proposed adding a new way of determining a “pay reference period” – the period of time an employer uses to check whether an employee is eligible for auto-enrolment – to make it simpler for firms to use their existing payroll systems to assess workers’ earnings.

Syndaxi Chartered Financial Planners managing director Robert Reid says: “It is good the DWP is trying to simplify payroll processes but this by no means solves the problem.

“A lot of small firms still have very basic payroll systems and this will not do anything for them.

“There could also be an issue when two companies with different payroll systems merge. When this happens there will inevitably be a period of transition and mistakes will be made.”

The DWP is also looking to simplify the rules for companies that have not reached their auto-enrolment staging date but already automatically enrol their workers into a pension scheme which meets minimum standards set by Government.

At the moment if an employee chooses to opt out of such a scheme the employer would be required to re-enrol them when their auto-enrolment staging date arrives.

The DWP has proposed introducing an exclusion from auto-enrolment in respect of workers who have voluntarily left one of these schemes within 12 months of the employer’s staging date. Under this proposal the employer would still be required to re-enrol the employee after three years.

In addition, policymakers are considering extending the “joining window” – the period of time after an employer’s staging date during which they must ensure all eligible workers are enrolled and issued with enrolment information – from one month to six weeks.

AWD Chase de Vere head of communications Patrick Connolly says: “It is positive the Government wants to make auto-enrolment less onerous for small employers. It would be farcical to force an employer which already starts auto-enrolment before their staging date to re-enrol employees who had opted out a couple of months earlier.

“Increasing the joining window will also give small businesses a little more breathing space and should reduce the risk of non-compliance and fines.”

The Government is also considering excluding workers with enhanced or fixed protection from auto-enrolment altogether. If these people were auto-enrolled and made a pension contribution they would lose their protection and could be hit with a tax charge from HMRC.

Hargreaves Lansdown pension investment manager Laith Khalaf says: “This would be a sensible carve out which would avoid the pitfall of people facing a huge tax bill as a result of being automatically enrolled by their employer.

“I think broadly it is good that the DWP is making auto-enrolment easier but it is still very complicated and employers will still need advice and help with communications.”

Pensions minister Steve Webb says: “These proposals are to make sure that parts of the legislation work better and are more user-friendly. We are also asking for suggestions on how we could recognise the best employers.

“Employers and our partners in the pensions and payroll industry have made a major contribution in delivering these landmark reforms. We want to build on this as medium-sized employers prepare to automatically enrol their staff into a workplace pension.”

Source: Money Marketing Tom Selby 4th April 2013

Minister warns of auto-enrolment fees –

– Pensions

OFT launches investigation into workplace pension schemes

The OFT has launched a market study to examine whether defined contribution workplace pension schemes are set up to deliver the best value for money for savers.

Alongside the introduction of auto-enrolment, the OFT says it wants to investigate whether competition will work in the best interests of workplace savers to deliver low cost, high quality pension schemes.

The study will focus on value for money and the size of pension pot savers end up with at retirement.

It will look at how pension providers compete with one another and how the market may develop over time and whether there is sufficient pressure on pension providers to keep charges low, plus the extent to which information about charges is made available to savers.

It will also consider whether smaller firms face difficulties in making pension decisions in the interests of their employees and whether they receive appropriate help and advice in setting up and maintaining workplace pension schemes.

The OFT says it will look into barriers to switching between schemes and a potential lack of ongoing employer engagement in setting up and managing pensions.

Senior director in the OFT’s services, infrastructure and public markets group Mary Starks says: “The UK workplace pensions market is set for rapid growth and change over the next six years, in particular with the introduction of automatic enrolment.

“It is important that these savers get a good deal. We want to take a look at the market now to ensure that providers are competing to offer the best possible deals, and that the choices made by employers mean that employees are saving into good pension schemes for their retirement.”

The OFT says it will work closely with the Department of Work and Pensions, The Pensions Regulator and the FSA during the course of its study.

It will also seek input from key players including the National Association of Pension Funds, the Association of British Insurers, pension providers, trade bodies and those that represent employers and employees.

The OFT plans to complete the study by August 2013.

ABI director general Otto Thoresen says: “People rightly need confidence in a system that delivers value for money pensions and works well for employees and employers. ABI members recognise this and are raising standards to meet customer expectations.

“Pension charges have fallen to their lowest level, and industry initiatives are set to ensure charges and costs are disclosed clearly in a consistent format, and that people nearing retirement get more help to get the best pension deal.

Aegon head of regulatory strategy Steven Cameron says: “We are pleased to see OFT will also examine if smaller firms receive help and advice. Advisers play a key role and we have concerns regulation is making it harder for them to help such employers. Advisers also encourage greater employer engagement which is particularly key as we progress with auto enrolment.”

Source of article: Money Marketing; 17.1.2013

State pension reform: Everything you need to know

The Government today published long-awaited proposals to introduce a flat-rate state pension worth £144 a week. Money Marketing’s Tom Selby analyses the implications of the plans.

What has the Government proposed?
The Government wants to introduce a single-tier, flat-rate state pension worth £144 a week, realising a long-held ambition of Liberal Democrat pensions minister Steve Webb (pictured).

Will everybody get this?

No, only future retirees will be eligible for the new flat-rate state pension. People will need to build up 35 qualifying years, either through National Insurance contributions or credits, to get the full payment. NI credits are given for things like caring for an elderly relative or taking time out of work to raise children.

People will not start to build up an entitlement towards the state pension until they have reached 10 qualifying years.

How will the Government treat people who have contracted-out of a defined-benefit scheme?

This is the difficult bit which Webb blames for several delays to the publication of the white paper.

Contracting-out will end when the single-tier state pension is introduced. As a result, these employees will need to start paying full NI contributions – an increase of 1.4 per cent of relevant earnings compared to what they paid previously.

The DWP plans to undertake a huge valuation exercise to determine how much state pension everyone is entitled to as at the implementation of the single-tier pension.

If someone has previously been contracted-out of the additional state pension, a deduction will be applied to reflect the fact they have paid lower NI contributions whilst they were contracted-out.

The Government will then check to see if the rules of the current system would give the individual a better outcome, with the higher valuation becoming the person’s “foundation amount”.

Anyone who has a foundation amount worth less than £144 a week will be able to continue to build up extra state pension entitlements until they reach this level.

Anyone whose foundation amount is worth more than £144 will still get the higher amount under the Government’s proposals.

How will employers with DB schemes react?

Well, that depends entirely on whether you are a public or private sector worker.

All employers with DB schemes who have contracted-out will see their NI payments increase by 3.4 per cent as a result of losing the NI rebate when contracting-out is abolished.

In the private sector, the Government wants to allow companies to adjust accrual rates to reflect this without having to get permission from the scheme’s trustees. This measure is designed to prevent firms closing their DB scheme altogether.

However, ministers have committed not to change public sector schemes for 25 years. As a result, public sector employers will not be able to reduce accrual rates to reflect the increase in scheme costs.

When will the new state pension be introduced?

The Government says it wants to introduce the new system in April 2017 “at the earliest”. However, during a briefing this morning Webb admitted this date is not set in stone and could be changed

How old will you need to be before you receive the state pension?

The state pension age will become a moving target, with the Government proposing to introduce a link with life expectancy.

This will be based on statistical analysis by the Government Actuaries Department. In addition, the DWP will set up an independent committee which will review other factors which impact on longevity, such as where someone lives.

The state pension age will be reviewed every five years and the Government will give people 10 years’ notice of any future changes.

State pension reform – the key changes:
a new, flat-rate state pension worth £144 a week in today’s prices will be introduced in April 2017 at the earliest;
the number of qualifying years an individual will need to build up to get the payment will increase from 30 to 35;
a person will need to have at least 10 years of National Insurance contributions or NI credits in order to qualify for the new state pension;
the payment will be based on individual qualification, without the facility to inherit or derive rights to the state pension from a spouse or civil partner;
contracting-out will be abolished;
future rises in the state pension age will be linked to longevity.
Source: Tom Selby 15 January 2013

John Greenwood: Will savers be convinced auto-enrolment is worth it?

The Government will have to do more on promoting cash lump sums if it wants to minimise auto-enrolment opt-outs.

Anyone who thinks that apathy is going to ensure low opt-outs for auto-enrolment is deluding themselves. When money starts coming out of their pay packets, and employees start receiving projections from providers, people are going to want to see good reasons why they should stay put.
For many of those older, lower paid employees, whose employers are paying in at the minimum 1 per cent matched contribution, the only reason they should stay put is trivial commutation – the ability to take their fund as a cash lump sum if it is less than £18,000 when they retire.

So the cash lump sum message – that actually, if you can hang on until age 60, auto-enrolment’s matched contributions makes it the best medium to long-term savings vehicle out there – needs to be a key part of the Department for Work and Pensions’ overall communication piece.

Yes, the DWP would find itself in the curious position of promoting taking cash rather than an income, which is after all the idea of the whole policy, but it is going to have to be straight with people about the reasons for staying put if they want the public to get behind it.

Even without the flat-rate pension, which is by no means a certainty, there is a risk that many people will be little better off as a result of the change.

The DWP’s research published in February 2009 found that 95 per cent of people will be no worse off on account of auto-enrolment. But that figure involves some hefty assumptions around annuities and investment returns.

Yes that research was carried out before the flat-rate pension policy was floated. But it was also published a month before the Bank of England started its policy of quantitative easing, which has punished annuity purchasers since then. Back in February 2009, a £100,000 fund would have bought a 65-year-old male a level annuity income of over £7,000. Today he would barely get £5,600. If the flat-rate pension does not go ahead, and questioning voices are beginning to emerge, then surely the DWP would get a different figure if it did its research again today.

This is not a negative reading of the situation, just a realistic one. The cost of buying pensions is the problem with pensions, as millions are about to find out for the first time.

When people get their pension projections through – and it is curious that auto-enrollers will not necessarily get the sort of personalised pension projections that people signing up for personal pensions typically get and will instead get broad-brush tables showing what different levels of contributions might give – they are going to reflect on the value of staying put.

Hundreds of thousands, possibly millions of over 40s automatically enrolled into pensions will, when they get their projections, realise they are only going to get a weekly income of less than the price of a curry.

They will have one of two reactions; that pensions and auto-enrolment are rubbish and they don’t want anything to do with them, or that they face a serious problem and need to start saving. Unfortunately, the former reaction seems the more likely. If opt-out rates are high, then the Beecroft report’s recommendation that contributions be kept at 1 per cent until after the next general election will certainly not have helped.

The nation is at the beginning of a very painful learning curve about just how much it costs to provide a meaningful income through retirement. It is an unpleasant conversation, but a conversation that desperately needs to happen. Getting the message over about cash lump sums can help take some of the nasty taste away.

John Greenwood is editor of Corporate Adviser
Source: Money Marketing 11th October 2-12

Auto-enrolment pension scheme opens

A landmark scheme to automatically place millions of people into workplace pensions is now under way, with many workers saving for their future for less than the cost of a weekly pint of beer.

Up to 10 million people are expected to be eventually be enrolled in what is hailed as the biggest pensions revolution since David Lloyd George ushered in state pensions a century ago.

A handful of the largest employers, with 120,000 or more workers, must place eligible workers into schemes, with firms gradually being enrolled in a staging process over the next six years.

More than half a million people will be newly saving into a workplace pension by Christmas, according to Government estimates.

Savers will typically need to put aside just over £2 a week to get them started, according to Nest, a not-for-profit pension scheme set up under the new rules.

In the first four years of the scheme, workers contribute a minimum of 0.8% of earnings which works out at around £2.37 a week for someone on an average annual salary of around £20,000, Nest found.

Based on this average, employers will contribute nearly £3 per week as well and almost 60p will be added in tax relief, meaning the total going in is just under £6 a week, or around £25 a month or £309 a year.

But by 2018, as the minimum contribution increases, employees will be putting aside around £12 of their pay every week, in return for almost £9 from their employer and nearly £3 in tax relief, leading to average annual contributions of £1,235, Nest said.

Automatic enrolment aims to tackle growing concerns about an old-age poverty crisis, as people live for longer but fail to put enough away for their later years.

Recent official figures show that the number of private sector workers paying into a pension is at its lowest since records began in 1953.

Last year 2.9 million private sector workers put money into schemes, the first time active membership has dipped below three million.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: “The UK is drifting towards an iceberg when it comes to paying for its old age, and we need radical reform like this.”

NAPF said its research shows that only a quarter (24%) of workers earning £14,000 or less save into a workplace pension.

“Crucially, this reform will reach those who have no pension: the young, the low-paid and those working for small businesses,” Ms Segars said.

Estimates of opt-out rates are varied, although the Government believes the reforms will eventually lead to between six and nine million people newly saving or saving more in all forms of workplace pensions.

TUC general secretary Brendan Barber said: “With this Government and the last helping ensure a wide consensus around the reform package, we have some certainty that we are now at the beginning of a pensions new deal. Of course it can and should be made better, but we now have what should be a stable framework.”

Some analysts have said the Government should go further in encouraging people to save, for example by making pensions more flexible so that workers can take some cash out if they need to or by increasing tax-free Isa allowances.

Ros Altmann, director-general of the firm Saga which provides insurance, holidays and financial services to people over 50, recently said that people’s confidence in pensions has been knocked by scandals, disappointments for people whose pensions have not turned out as they expected and low annuity rates which have “left many pensioners receiving much poorer value for their pension savings than ever before”.

The UK’s pension system is “the most complex in the world” and filled with jargon, she said.

Pensions Minister Steve Webb said: “We are proud to be introducing this truly historic change which will radically alter the way we save for our old age and see millions more people putting something aside for the future.

“From October we will start seeing large firms, such as banks and big supermarkets, automatically enrolling their staff into a workplace pension. Between now and 2018 more and more employers will come on stream, right down to the smallest ones.”

An advertising campaign featuring TV stars such as Theo Paphitis and Nick Hewer was recently launched to raise awareness of the scheme which will automatically enrol anyone aged over 22 who earns more than £8,105 and who works for a company which is affected.