Personal Accounts – The National Pensions Savings Scheme

It is now widely recognised that there is a woeful lack of provision for income in retirement for the majority of the UK population. The government has pursued a number of strategies to attempt to bolster state provision; removing the earnings cap for NI, introducing the Minimum Income Guarantee, and raising state retirement ages for example. However, with increasing longevity set to continue they have recognised that the changing demographic of UK Plc’s workforce (i.e. ever reducing proportions of workers who can be taxed to support retirees) that they can no longer afford to fill this savings gap with state benefits alone.

For some time now the government have attempted to incentivise employees to save; though generous pension’s tax breaks, legislating for access to workplace pensions, and latterly in simplifying pension rules to make things easier to understand. Arguably these attempts have largely failed to address the problem with the average UK employee who still remains largely unengaged with retirement planning. Consequently new legislation is to be introduced in the coming years which will ensure that all UK employees, and their employers, will be forced to make regular pension contributions. This initiative is to be known as “Personal Accounts”.

Personal Accounts (PA) are due to be introduced in April 2012. We have a number of concerns for our corporate clients with the current proposals;

• are due to go live at midnight on the 6th of April 2012 for around 10 million UK employees. The government’s reputation on the deployment of large IT schemes leaves something to be desired and there may be significant disruption to UK Plc.
• >All employers will be forced to provide contributions of 3% of their salary role into the scheme – as payroll is generally the largest single cost for the majority of employers this will mean significant additional expense. This will be the case even for employers who currently have relatively generous pension schemes as the majority presently have take up rates of no more than 80% or so of the eligible workforce.
• It appears that contributions will have to start from day 1 of employment. Many employers have a waiting period before pension membership can start, typically after any probationary period ends. This increases costs further.
• The definition of “pensionable earnings” for Personal Accounts is essentially all earnings, so includes variable elements of pay such as overtime/bonuses and commissions etc. Most employers don’t currently include pension variable pay elements so again this indicates greater costs. Additionally the fact that these elements of pay vary week to week, month to month, will inevitably mean significant additional work for payroll administrators.
• Personal Accounts will only cover earnings up to £33,450 per annum. Consequently there is a risk of having a two tier pension system for lower and higher earners with all the additional employer administration this will incur. Furthermore, in the current climate, having a different arrangement for higher earners may raise eyebrows along the lines of “fat cat bonuses”!

Employers have tended to start pension schemes either as an act of benevolence to staff and/or to enhance their position as an employer of choice thus aiding both recruitment and retention. In either event these advantages will be significantly eroded by the introduction of Personal Accounts and employers will need to consider what actions they need to take both to contain costs and to maintain their competitive edge.

Personal Accounts – Employer Q & A

For most UK employers, even those who currently offer staff pensions, it is inevitable that this piece of legislation as it stands will result in both disruption and greater costs, why?

• Typically staff related expenditure represents around 85% of the average UK employers’ costs. Any increase in staff costs will have a marked effect on profits.
• In our experience even employers with generous pension schemes (defined as 6% or more in employer contributions) do not achieve full take-up from all eligible employees.
• The definition of eligible earnings for Personal Accounts is wider than most employers currently use.
• Most companies’ eligibility criteria for existing schemes will currently exclude large sections of the workforce who will become immediately eligible to Personal Accounts.

There are strong reasons for you to act in advance of the arrival of Personal Accounts. Acting now, perhaps by using a mixture of both salary exchange and part of any future employee pay rises, could help you to manage out all the initial shock of the costs associated with the advent of Personal Accounts.

Furthermore, if you do nothing more than adopt Personal Accounts in 2012 your employees will rightly view this as being something you simply had to do and therefore see no benevolence in the act. The additional cost you will inevitably be incurring when Personal Accounts start will buy you nothing in terms of your employees’ perception of you.

Will it be better to switch to Personal Accounts when they arrive or should we ensure our current scheme, or any new scheme we are considering, is exempted?

There are a number of reasons why we believe most quality employers will want to offer their staff an exempted scheme rather than adopt Personal Accounts;

• Personal Accounts won’t serve the needs of higher earning employees well as the maximum contribution is just £5,000 PA. Consequently, those employees eligible to total contributions in excess of this amount will require some form of “top-hat” scheme. This means having two arrangements rather than one, causing more administrative headaches for employers than would be needed under an exempt scheme which can accommodate the diverse needs of all employees.
• All earnings, not just basic salary, are taken into account. This will mean significant additional work for HR/Payroll departments who will need to recalculate contributions for those with variable pay each and every month/week. If you can demonstrate that an employee is no worse off in your own arrangement then you will be able to continue to manage contributions in a way that is less onerous, such as a single annual review of payment levels for example.
• It appears that exempt schemes will be able to operate a 3 month eligibility period; this could be beneficial to employers with high seasonal work force variations.
• Personal Accounts will have a transfers moratorium – preventing employees from moving money in or out during the first 5 years. Employees generally want to rationalise their different pension “pots” into one account, this will still be possible with an exempt arrangement.
• Personal Accounts start at midnight on the 5th of April 2012 when some 10 million employees may need to be enrolled into a scheme all at once. While there may be some “phasing in”, the Government’s track record on large IT projects is patchy at best and many payroll providers may also struggle to cope. There is a serious risk of business disruption while this settles down.
• Exempt schemes are likely to offer very wide investment choices to employees. Personal Accounts in contrast will have very limited fund choice, and probably no ethical investment options; those employees who have previously taken more control over their investments may not want to lose these options.

Ultimately we believe exempt schemes will be adopted by those employers who want to drive value for money from their pensions spend, after all if you are only offering the legislative minimum required under Personal Accounts then you have no way of delineating your pension offering from other employers doing the same. A good quality exempted scheme need not cost the employer any more money, and indeed has the possibility of saving you money in that such a scheme may yield commissions enabling you to meet some or all of the cost of employing scheme advisors/administrators to deal with much of the member/employee communication work and support needed.

We believe that the majority of employers who currently offer a good quality staff pension arrangement will be better served by looking for exemption from the requirement to provide Personal Accounts. Achieving exemption will;

• Minimise the impact of disruption as the scheme is already established.
• Enable you to promote an arrangement which, even if it doesn’t have larger contributions, has greater choice and flexibility. This enables you to maintain a competitive edge against competitors.
• Promote loyalty through a clearly co-branded individual offering.
• Offer reduced administration through the ability to base contributions on a less variable definition of pensionable pay.

The effectiveness of any measure will depend upon the communication strategies deployed. Lighthouse Group Employee Benefits has significant experience in this area and can help you to ensure you adopt an effective approach, deriving maximum value for money.

We are happy to provide assistance in modelling the effect of various strategies on your workforce, using our own experience of take-up rates for particular approaches and communication strategies, and different employee demographics.

Whatever action you resolve to take it is clear that addressing these issues early will be the key to managing down costs. We also believe it will be the key to deriving maximum employee value as it is inevitable that if you leave action until the average employee is aware of the advent of Personal Accounts that they will simply see anything you do as complying with legislation rather than a benevolent attempt at providing them with a benefit.

For all employers we believe it will pay dividends to engage with this issue now and develop strategies well in advance. For further information contact Steve Howard, Managing Director Lighthouse Group Employee Benefits (0161 819 4940)