Preparing pension schemes for 2012

Steve Herbert, head of benefits strategy at Origen, offers his top tips for HR and employers on getting their pension schemes ready for 2012.

On this page:
Review what is already in place
Make a decision regarding existing schemes and personal accounts
Use your time wisely.

UK business is once again braced for the impact of further pension legislation. It's a bit like being stuck in some form of legislative time warp, and once more, many - perhaps most - employers in the UK will need to make significant changes to their pensions and benefits as a result of the new proposals.

This legislation differs from past efforts to get Britain saving, however, as there are two distinct drivers at its heart: that of auto-enrolment, and compulsory employer contributions for all. In a nutshell, more people saving and supported in doing so by their employer. This is going to cost UK plc significant sums, so forward planning by employers is a necessity, even in the depths of what may turn out to be a rather nasty recession.

So with this background - and if you will excuse the link - let's do the time warp again. Here are my top tips for employers:

Review what is already in place

A natural starting point for most employers will be to undertake a detailed audit of existing pension arrangements to establish how they will compare against the proposed personal accounts offering and the new legislation.

This comparison may be on two levels. The initial comparator is likely to be dictated by what the legislation suggests is a 'good quality' pension scheme. There will be a series of criteria which any existing scheme will be judged against. If your scheme meets, or exceeds, these levels, there may not be a requirement to offer personal accounts at all.

While the criteria seem fairly innocuous at first glance, the devil is in the detail. Employers will need to be aware of differences in the definitions between the legislation and the existing scheme. Examples here include the definition of earnings, waiting periods, and employee access.

Even if the existing scheme meets the above criteria, an employer will need to ensure that the scheme either offers significant advantages or flexibility over the proposed personal accounts offering. Ideally, such advantages should be beneficial to both employer and employee. This is not automatically the case, and I have already seen several schemes which may achieve exemption, but would not offer any significant improvements to either party.

For instance, a scheme may contain a charging structure which could be higher than that likely for personal accounts. In this scenario, employees are likely to question why your company scheme is so much more expensive. Put simply, there is no point in offering an alternative to personal accounts if no-one benefits from it. Which leads nicely to my second tip...

Make a decision regarding existing schemes and personal accounts

Should your organisation run both an existing scheme and personal accounts, or should the employer offer only one arrangement instead? This will be a key decision for many employers.

The complexities of running dual schemes may well be too onerous for many employers. Indeed, it is possible that by offering both, the existing scheme may be devalued when the schemes are compared by employees. For many employers a definitive choice may be preferable, that of offering either personal accounts, or a better alternative.

This does not necessarily mean that personal accounts will end up being the common choice for UK employers. There has been a disproportionate amount of press coverage warning of UK employers using 2012 as an opportunity to 'level down' to the legislative minimum levels. While it is inevitable that some employers will do so, most will base their decision more around business fundamentals.

Employers operate quality pension schemes for a variety of reasons, including moral duty, tax advantages and, most significantly, wishing to be seen as an employer of choice. Even in a recession, it is likely that your good employees could change jobs if they wished to, and it's arguable that it's much more important to retain such individuals in hard times. It is therefore important to make sure the benefits you offer provide your company with a competitive advantage. Only by doing so can you expect to get a concrete return on investment (ROI) for your pensions spend.

If you decide to operate your company scheme instead of (or perhaps in addition to) personal accounts, to achieve maximum ROI, you need to ensure that your offering is as robust as it can be, and also undertake a strong employee communication exercise to explain the improvements.

Use your time wisely

I suspect that many readers will accept my comments above, but in light of the recession may opt to park this issue until a later date. While this may be tempting, it could well be a mistake.

For starters, auto-enrolment is likely to lead to higher pension scheme membership, regardless of which scheme you opt for. Higher membership means more cost for many employers, and few are likely to want to fall off that cliff-edge in 2012. As a minimum, you should ensure this extra cost is at least factored into your company's long-term business plan.

In addition, there are many possible ways that a scheme can be improved to make it better than personal accounts. Options include: advice, charges, contribution structure(s), administration platforms, fund choice and salary sacrifice. All these items may take time to review, select and establish. The longer you leave your initial investigations, the less time there is to control your costs.

Finally, some pension providers still offer commissions to intermediaries. Such payments may assist the employer by meeting some or all of the year-one costs of scheme consultancy and advice. The long-term future of commission payments is uncertain though, and it is possible that commission will not generally be available in 2012. Therefore, employers that delay improvements to their schemes may see this valuable option to help reduce their initial costs removed from the equation.

With proper planning, your organisation will be able to establish the best possible scheme to meet and better the new legislation, with the minimum cost impact, and the maximum ROI.