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The big pensions shock

Written by Sophie Trimble and Helen Yates
October 2009



Sophie Trimble introduces the context relevant to charities and their pensions provision and warns that the impact of 2012 changes should not be underestimated by the sector


The Department for Work and Pensions estimate that around seven million people are not saving enough to deliver the income that they are likely
to expect in retirement and, in the Pension Commission's 2005 report, automatic enrolment into a workplace pension scheme with an employer contribution was identified as a key instrument in dealing with the savings gap.

The Pensions Act 2008 has reformed workplace pensions and critically, from 2012, has placed a responsibility on employers to auto-enrol all eligible jobholders into a scheme that satisfies certain criteria. One option that will meet these criteria is the Government's Personal Accounts Scheme. This will take the form of a national, trust based occupational scheme, regulated by The Pension

Regulator and available to all employers with low member charges. Alternatively, employers can continue to operate their own qualifying workplace pension scheme and, for many, there may be compelling reasons to do so.

One of the main areas of concern for employers will be the administrative responsibilities associated with auto-enrolment. The draft regulations issued by the DWP on the operation of auto-enrolment are complex and as such the practicalities are likely to present significant difficulties for many employers. It is likely therefore that for many organisations a review of systems and controls will be necessary to determine their ability to meet their new responsibilities.

In addition, it is unlikely that Charities will be authorised by the Financial Services Authority to give financial advice, although as part of the new requirements, they will be expected to ensure that their employees receive sufficient information to understand the pension scheme. The line between advice and information is often blurred and ensuring effective communication without being exposed to the risks associated with providing financial advice may be challenging.

Perhaps most significantly though, for many employers and employees the minimum contribution will represent a significant increase in their regular costs.

The Personal Accounts scheme will require the employer to contribute a minimum of 3% of the employee's qualifying earnings with a further 4% contributed by the employee and 1% obtained through tax relief.

This structure will be reflected in the qualifying criteria for money purchase schemes and may be of particular concern when considered in the context of the current economic climate.

Organisations will therefore be keen to ensure efficiency in terms of both charges and taxation and this will be especially relevant for third sector organisations with a duty to both their donors and beneficiaries.

As 2012 continues to gradually creep up on us, employers should now be taking steps to understand the impact that the changes will have in order that they can develop a response. Our experience to date, however, shows that for many charities the 2012 reforms remain firmly below the radar.

This is perhaps not surprising given the recent economic climate and the effect that it has had on income; financial controls have tightened and for many organisations this has had a direct effect on their reward strategy. Following the Charity Commission's Big Board Talk published in June 2009, it is likely that charities will already be asking questions about their pension provisions, and it is essential that these issues are also considered in the context of the reforms.

The impact of the new legislation should not be underestimated, and only by understanding the reforms and how they relate specifically to the organisation, can employers hope to develop a response that minimises the negative effects.

Although 2012 may seem a long way off, formulating an effective plan can take time, and the earlier an employer can begin planning the better.

With much of the detail yet to be confirmed, and with a general election looming, there are still a number of uncertainties that make implementing a sound strategy difficult for employers. What is clear though is that workplace pensions are undergoing a radical overhaul and employers' duties look likely only to increase.

The following feature looks to highlight the main issues which charities should be considering as well as provide a point of reference for organisations that may so far be unaware of the detail of the legislation. The message underpinning the detail is clear however; charities need to ensure that they are well prepared for the changes in order that the organisation and the services it delivers are protected from the potential risks presented by the reforms.

Sophie Trimble is a director at Hettle Andrews



Charities are ill-prepared for new pension legislation due to come into force in 2012. For many, the additional costs will come as a shock after a long and deep recession, finds Helen Yates


As of April 2012, all UK employers will have to automatically enrol eligible staff in a "personal account" pension scheme if they are not already in a good quality workplace pension. While employees have the right to opt-out, the new laws are expected to hit many employers with substantial costs.

For medium to large-sized charities that do not have existing pension schemes or a low take-up rate of their pension scheme, the pension compulsion could cost them as much as £100,000 to £500,000.

The new laws are proposed in the Pensions Act 2008 (see box for key proposals). The Act was published as a response to Lord Turner's Pension Commission report in 2005, which found that the UK risked a pensions crisis with people living longer into retirement.

The State Pension was ill-equipped to support an ageing population and not enough workers were contributing to private schemes it concluded. The report gave recommendations to help more people save for retirement, which included the auto enrolling of staff into pension schemes and raising the age
of retirement to 68.

The radical changes will combat the "inertia" of getting more workers into private pensions, promises Peter Hain, secretary of state for work and pensions, in a statement. "For most, the downsides of not saving far outweigh the small risk of saving and later regretting it. These reforms will give millions of people the means to fulfil their aspirations for a better and more secure income in later life."

Third sector contributions

But for many businesses, the new legislation simply transfers responsibility for pensions from the public sector to employers. For most employers, the biggest concerns are the financial costs associated with compulsion in 2012. Pension contribution requirements for each employee are roughly 8% of earnings, of which the employer must contribute 3%, the employee 4% and the Government 1%.

For the third sector, particularly charities that have a high proportion of staff that are not involved in an existing pension scheme, the contributions
could mount up significantly come 2012 when they are automatically enrolled in the personal account scheme.

"You could have a very generous employer contributing 10% into a pension scheme but employees aren't joining because they don't understand it or they're not receiving sufficient information about retirement planning," says Ian Bird, principal partner at Foster Denovo.

"Then all of a sudden the legislation comes into effect and 1,000 people
have to be enrolled into the scheme on the same day."

Despite the financial implications, many charities are unprepared for the changes, according to an employee benefits survey carried out by the Association of Chief Executives of Voluntary Organisations (ACEVO) and Foster Denovo.

It found that 63% of organisations had not considered the financial impact of the new legislation, while 66% had not considered what strategy they would adopt to prepare for the changes. Larger charities were more likely to have done an impact assessment than smaller charities. "The survey showed there was a tremendous lack of awareness of what the implications could be," says Bird.

While 82% of charities currently offer a pension scheme to employees, this was down significantly from 90% a year earlier and still means that 18% of charities do not offer any scheme at all. Not all schemes are contributory and a number of charities have a low take-up rate. "In our experience many of the large care charities, who employ several hundred staff or more, often encounter problems getting staff to engage with their pensions," reveals Bird. "As a result, several of these employers have low take-up (around 20-40%) of their pension scheme."

Minimising impact
Charities are advised to plan ahead for the changes. While 2012 may still seem like a long way ahead, a good strategy can help avoid unnecessary costs and help to prepare organisations more gradually for the change. "The first thing to analyse is the financial impact of 2012 and we can help employers to do that," says Bird. "Stage two is to consider whether the pension scheme you currently operate is going to be appropriate."

Charities with generous benefits and contributions may find they are unable to afford these come 2012. Final salary schemes - in both the voluntary and private sector - are expected to become a thing of the past.

Under the new legislation, such gold-plated schemes will simply become unaffordable, as will generous pension contributions. "A couple of significant charities have already told me they're going to have to reduce their costs in order to afford full take-up," reveals Bird.

Charities can consider other ways of minimising the costs associated with pension compulsion. A popular method is salary sacrifice, reveals Steve Charlton, principal within Mercer's retirement business.

"An employee will actually give up some salary equivalent to their pension contribution and the employer would pay that contribution on their behalf, which means the employer doesn't pay national insurance on the element of salary that has been sacrificed," he explains. Salary sacrifice could bring the cost of contributions, for the employer, down by as much as 22%.

New legislation
Another way of reducing the impact of the 3% contributions is to save for them over the next three years. Charities could consider saving 1% per employee each year, and perhaps offer this as part of or instead of a pay rise. Employers could for instance, offer each staff member a pay rise of 2%, but put 1% towards their pension contribution.

This was a tactic used when compulsion was introduced in Australia, reveals Charlton. "Pay rises were effectively limited for the period whilst the contribution was phased in. But in the current economic times that we live in there aren't a lot of pay rises around anyway. Whether they will be back on the table again in 2012 - you would hope so - that's one method companies can adopt."

Ultimately, the best thing charities can do is be prepared for the new legislation, to consider the cost implications and where they can reasonably make some reductions. Charities with good pension arrangements and a decent enrolment should not expect too great a change.

But charities without a scheme or with low participation should be preparing now for 2012, says Charlton. "There's no real magic answer - the best thing people can do is be aware that it's coming and make sure that come 2012 it's not a surprise."

Third sector concerns

While the new pension legislation will affect all UK employers, there are a number of concerns that are specific to charities and that may impact how they prepare for 2012. One is how pension contributions will be invested.

"Making sure that the investment approach is suitable from an ethical perspective could be important," says Sophie Trimble, director at Hettle Andrews Employee Benefits. "[The Government] is suggesting an ethical fund [for the personal account scheme] but different charities by their very nature have different concerns. They'll be keen to understand where their
and their member's contributions are being invested."

Charities also need to be careful that any flexible benefits they offer staff are not seen as an inducement to opt out of their pension scheme. For instance, many charities currently offer staff a flexible cash amount, which employees can put towards a pension or take as a bonus. But in future, employers could be taken
to task over such benefits. Inducements - such as higher salaries or one-off bonuses - which encourage staff to opt out of their workplace pension, will become unlawful under the Pensions Bill.

Eligible employees
Another implication of auto enrolment is how it will affect agency workers and contract workers. Even volunteers could be considered eligible for the personal account scheme if they are offered some benefits that could be seen
as remuneration.

Under the Agency Workers Directive, which could become law in 2010, an agency worker would be entitled to equal treatment as full-time employees after
12 weeks in a given job. This means comparable pay and conditions including, sick pay, holiday leave and pension enrolment.

Trimble thinks those charities that rely heavily on agency and contract staff to keep costs manageable may in some circumstances have to revisit their business models. "Charities need to determine how many and which categories of employees are going to be affected," says Trimble.

"At that point they're going to need to make some assumptions about how many of those eligible employees will remain opted into the scheme. Employers can then undertake an assessment of the potential cost and begin looking at strategies of how to manage and absorb that cost."

There are green shoots that the UK economy is starting to emerge from recession, but for many charities there is still a long way to go. While 2012 may still be three years away, the prospect of the additional costs of contributing to all staff pensions should provide the impetus needed to prepare for the changes sooner rather than later.

"It's a cost that has to be met from somewhere and for charities in particular, given the recent economic climate and the effect that it has had on fundraising and income generation, it may not be so easy to find the funds," says Trimble.

Helen Yates is a freelance journalist.


2012 pension compulsion: The Acevo Benefits Survey

All eligible employees, who are not already in a good quality workplace pension, will be automatically enrolled by their employer into a personal account although they will have the ability to opt-out. Both the employer and employee will have to pay into it.

A third of employers have considered the strategy they will adopt in preparation for this change. Again, the larger the organisation, the more likely they are to have done so (24% of the smallest organisations, rising to 71% of the largest).

Over a third (36%) of organisations have considered the impact of auto- enrolling all staff over the age of 22 into a pension scheme with an employer contribution. The largest organisations (with 200+ employees) are more likely than average to have considered this (71% compared with 36% overall).

Pension arrangements
Eight in ten (82%) organisations offer some sort of employee pension arrangement, either contributory or non-contributory. This is a significant reduction on the figure of 90% reported last year7 and does not vary significantly by company size.

Types of pension

The most common types of pension offered to new members in normal job roles are the group personal pension (32%), an individual personal pension or stakeholder pension (26%) and the group stakeholder plan (23%). Whilst nearly a quarter (23%) of organisations offer some sort of company scheme, just 6% offer a final salary scheme to new members in normal job roles.

Group personal pension plans are more likely to be offered by larger organisations than smaller ones, whilst the converse is true of individual personal pensions or stakeholders, with more small organisations offering them than larger ones.

The most common types of pension offered to new members in senior management roles are again the group personal pension (29%), an individual personal pension or stakeholder pension (24%) or a group stakeholder plan (19%). Just 5% of organisations offer a final salary scheme to new members in senior job roles.

As with normal job roles, group personal pensions are more likely to be offered by larger organisations, with smaller organisations more commonly offering an individual personal pension or stakeholder pension. Larger organisations are a little more likely to offer a final salary scheme than the smaller organisations, although the relationship between company size and final salary scheme is not clear cut.

Organisation contribution
Most (95%) organisations offering a pension also offer to contribute to staff pension arrangements.

Contribution basis

Organisations offering to contribute to employees' pensions schemes offer on average (median) a maximum contribution rate of 7% of basic salary. Organisations which have a final salary scheme in operation tend to offer a higher maximum contribution as a percentage of basic salary, with a median rate of 10% of basic salary amongst this group. For those who do not have a final salary scheme, the average maximum level of contribution offered
is 6%.

Minimum contributions required of employees in order to attract an employer contribution are an average (median) of 3% overall.

Employee minimum contributions tend to be higher among employers with a final salary scheme (median 5%).

Average employee contribution

The average employee pension contribution for all organisations which offer a pension scheme is 5% (median).

The average employee pension contribution amongst organisations with a final salary scheme is 5.4%. For organisations which contribute, but do not offer a final salary scheme, the average employee contribution is lower, at 4.5%.

Proportion of staff in pension scheme
A quarter of organisations say that more than 80% of their staff are members of their pension scheme. This is the case in more small organisations (with turnover of under £1 million) than larger ones.

Final salary pension

A fifth (21%) of organisations currently have a final salary pension scheme.

Organisations with a higher annual turnover are more likely than average to offer a final salary scheme to employees.

Salary sacrifice

One in five (19%) organisations with a pension scheme allow their staff to contribute to their pension by salary sacrifice, whilst three-quarters (74%) do not.

Of those who do not allow their staff to contribute to their pension in this way, two-fifths (39%) say it is because they are not aware of the benefits of salary sacrifice, while a fifth (20%) say it is because they don't know how to implement it within their organisation.

Value of pension scheme
59% of employers think that the majority of their staff believe the organisation's pension scheme to be a useful staff benefit, while a further 21% think that it is seen as an essential staff benefit.



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