We’re all living longer and it seems no one is going to keep us in our old age.
New laws and Government proposals are intended to help combat this problem. Smallbusiness.co.uk examines how these changes could affect your business
You’re probably familiar with the hype that surrounded April’s ‘A’ Day, which was the day the Government’s legal attempt to simplify pensions arrangements came into force. On 6 April, new laws fixed a limit to tax-free pensions contributions and attempted to make retirement options more flexible.
But Vicky Summers, employee benefits consultant at PKF, thinks that, although ‘A’ Day may not be relevant to many medium-sized companies who don’t run pensions schemes, ‘lots of businesses are now re-assessing how their remuneration packages are structured as elder members of staff and higher earners find they are nearing the £1.5 million lifetime limit.’
The next major landmarks appearing on the pensions horizon are the legislative modifications proposed by the Pension Commission led by Lord Turner. If passed into law, these recommendations could see a National Pensions Savings Scheme (NPSS) established in the next few years, with all employees included in schemes and companies compelled to make contributions. Specifically, staff would automatically be incorporated in company pensions schemes and then have to opt out
if they choose to. Other suggested changes include employees contributing a minimum of four per cent of their salary to a company pension, of which one per cent would be paid through National Insurance tax relief, and employers would have to contribute a further three per cent, making a total contribution of eight per cent.
Compelled to conform
According to research by insurer AEGON, around a third of the UK working population, 8.6 million people, currently claim to have a pension operating through the workplace. However, recent research from Bibby Financial Services supports the implication that almost two-thirds of small business owners have not put contributory pension scheme in place. This is a considerable ‘black hole’ that the Turner Commission proposals aim to see plugged.
Business leaders at the Institute of Directors say, ‘The burden of pensions on employers is already high enough,’ and oppose compulsion on employers, for it will ‘increase labour costs and act like a tax on employment’. The Confederation of British Industry agrees, adding that, ‘Smaller firms in particular would be hard hit and compelling them to find the money for pension contributions could push some to collapse.’
Prepare now for pension reform
Although Turner’s proposals are a couple of years away from becoming law, if at all, PKF’s Summers advises, ‘Being aware of employer compulsion, or the possibility of it, is important. Company directors should consider what a big part pensions play in their remuneration strategy and it would also be wise to think about introducing opt-out schemes before it becomes law.
‘A second wave of legislation is going to come into play after the 2006
Budget – after the new regulations are already in place. So you need to make sure your finance team and advisers are on top of it now – don’t put your head in the sand in denial.’
If you think your finance staff need to get a better understanding of potential pensions risks, the Association of Corporate Treasurers has developed a course – the Certificate in Pension Risk Management – to help small businesses treat the various risks and new regulatory issues ‘in a unified way’.
The Pension Service
Department for Work and Pensions
Association of Corporate Treasurers