Mixed Reaction To UK Pension Shake-Up
Tuesday, November 02, 2010

The pensions industry in the UK has welcomed government proposals to press ahead with auto-enrolment into workplace pensions in order to expand the provision of private pension coverage, although small firms are warning that they are hardly in a position to set up and run pension schemes given the fragile economic climate.

Under the plans announced by the government last week, employers will have to make pension contributions for eligible workers from 2012, ending what the Department of Work and Pensions described as "decades of decline of membership in workplace pension schemes."

Other key measures in the reforms include: aligning the earnings threshold at which an individual is automatically enrolled with the personal allowance for income tax; introducing an optional waiting period of up to three months before a worker needs to be automatically enrolled; simplifying the process for employers to certify that their money-purchase scheme meets requirements; and the establishment of the National Employment Savings Trust (NEST), which will be the new low-cost pension scheme, intended as "the vehicle for saving for millions."

"Our reforms will ensure that millions of people will start to save for their retirement, many for the first time," stated Minister of State for Pensions, Steve Webb. "Building on the consensus for pension reform, NEST will play its part as we transform the savings culture in this country."

According to Joanne Segars, Chief Executive of the National Association of Pension Funds, this "common sense" approach will widen pension provision, whilst still keeping existing good schemes open.

"It is a relief that all employers will be brought into the 2012 programme, and that smaller outfits will not be exempt. The whole point of this reform is that pensions reach all workers, including those in small firms," she said.

Segars added that the NAPF is "pleased" the government ignored calls to significantly raise the earnings bar at which auto-enrolment is triggered.

"This would have put pensions beyond the reach of the very workers we need to reach. Raising the auto-enrolment trigger to GBP7,500 pa, with contributions payable from around GBP5,000 will help ensure that it pays to save, and that pounds not pence are paid into a saver’s pension," she noted.

However, the Forum of Private Business, which provides support and advice for small businesses, warns that these changes will add cost and create extra administrative burdens when small businesses can least afford it.

"The government has stated repeatedly that it wants the private sector to pull the UK out of the economic doldrums by driving job creation. Yet by abolishing the DRA (default retirement age) and forcing even the smallest of businesses to provide pensions for their staff, it is creating a huge incentive for firms to avoid providing proper, permanent jobs due to the risks and costs involved," Forum spokesman Phil McCabe said.

"Instead, they will increasingly be forced to use temporary staff and self-employed labour in order to remain competitive. We appreciate that the government needs to tackle the pensions shortfall and reduce the costs associated with an ageing population, but it is unfair and counter-productive that businesses struggling to emerge from one of the worst recessions in living memory should be expected to foot the bill," McCabe added.

The Federation of Small Business (FSB) has said that it is "extremely disappointed" the government has decided against exempting micro firms from automatic enrolment into pension schemes. The group says that the proposed changes are complicated for micro businesses to put in place, and micro firms lack the expertise to choose a pension scheme for their staff. FSB research shows that seven in 10 business owners do not feel confident in choosing a pension scheme for their staff.

"While the FSB welcomes initiatives to help people save for their future, the FSB is severely disappointed the government has not listened to the needs of the UK's micro firms and has not made them exempt from automatic enrolment into pensions, which will cost employers in time and money," Mike Cherry, FSB Policy Chairman commented.

However, Cherry did welcome the proposed measures designed to ease the administrative burden on businesses. "We know that small firms do not feel confident in choosing a pension scheme because of its complicated nature, so are pleased that the government has put in steps, such as the waiting period, to make the administrative burden slightly easier," he concluded.