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Firms face £10bn contracting-out bill for new state pension

UK firms are not acting quickly enough to address new costs of up to £10bn as a result of the introduction of the new single-tier state pension and the end of contracting-out of the state second pension.

As a result of the reforms, which come into effect from April 2016, employers with defined benefit pension schemes and members will face increased National Insurance Contributions, which are likely to pass £1bn a year, or more than £10bn over the next decade, according to Hymans Robertson.

The actuarial consultant’s survey of 98 pensions, HR and finance professionals found a lack of understanding of how employers should prepare for the new state pension.

Half of those surveyed said they were unsure which changes they are likely to make to their scheme, while 29 per cent said senior management don’t know about the resulting costs.

Employers have been given a statutory override to amend scheme rules to offset the increased costs of running DB schemes, without the consent of trustees.

But only one in ten respondents indicated they would use the override, with 8 per cent planning to reduce staff’s pension benefits and 2 per cent saying they would increase employee contributions.

A further 10 per cent revealed they were considering closing their schemes to future accrual as a result.

Hymans Robertson partner Sue Waites says the changes are potentially as important as auto-enrolment but warns firms are not taking action quickly enough.

She says: “While some companies feel they are on top of the end of contracting out, the evidence suggests that many do not fully appreciate the impact it will have on their business. The facts are simple: if they do nothing, national insurance contributions will go up. Someone must plug this gap, whether it’s the employer or the employee.

“This change will accelerate the decline of many DB schemes, ultimately sounding the death knell for some. There are around 4,000 schemes still open to accrual. Schemes that choose to close to future accrual will have to justify this decision and show it is an appropriate trigger for such an action.”


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