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Advisers have a key role to play in helping employers put complicated pension reform into practice in 2012
Practice makes perfect
Rachel Vahey The Expert
My head is buzzing. Aegon has just submitted its response to the Department for Work and Pensions’ regulations for workplace pension reforms. The industry has had a brief six weeks - not the usual 12-week consultation period - to wade through more than 200 pages of detailed guidance, rules and regulations to get an understanding of how the DWP envisages automatic enrolment will work in practice.
What is clear is this is not simple and employers, providers and advisers will have their work cut out over the next three years in getting to grips with it.
Employers especially will find this tough going. The definitions of different types of employee alone - worker, jobholders, eligible jobholders, accidental jobholders, jobholders without qualifying earnings, postponed jobholders - is enough to make the most hardened pension anorak reach for the aspirin, never mind your average employer.
Employers will need help from advisers in understanding automatic enrolment. Employers have to deduct contributions from jobholders’ pay packets from day one, and possibly before the person has had a chance to opt out. If someone does opt out, then these contributions must be returned. Employers also have to accommodate the fact that different types of worker will need alternative communications, depending on whether they are being automatically enrolled, invited to opt into pension saving, already a member, or their automatic enrolment date is being postponed for three months.
Advisers will need to help employers review current pension provision to meet the new requirements for qualifying pension schemes. By far the most problematic element is that contributions will be measured as a percentage of band earnings, whereas the majority of contributions today are paid as a percentage of basic earnings.
To help employers, the DWP has introduced the concept of self-certification. This was originally intended to remove the need for employers to check every person’s contributions against the legislative benchmark if broad- brush conditions were met for the scheme. But despite months of discussion with the industry, the final proposed legislation falls short of the mark and still requires employers to conduct vast numbers of checks. It also provides little practical support.
Advisers will need to offer assistance to employers in absorbing the costs of workplace pension reform. As well as the cost of additional contributions, employers also face new administration costs. The DWP has worked these out to be £258m in the first year and £25m thereafter, although these estimates appear to be on the low side.
Employers may have to take action to mitigate such costs and this could include reducing salary increases in the run-up to 2012. However, in these current times of pay freezes this may not be an easy solution.
A real concern is that employers may reduce pension and other benefits. We need to work together to prevent this. Maintaining these benefits helps people realise their goals of an adequate income in retirement while helping employers retain good staff and attract new ones.
Workplace pension reform will have a big impact on the pension industry. Advisers - whether they work with corporate clients or wealthy clients (who may be employers) - need to get to work on fully understanding both the rules and the implications. Their existing, as well as new, customers will need their help in preparation for 2012.
Rachel Vahey is head of pensions development at Aegon
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