Employers given more time to prepare for pension reforms

The government’s pension scheme for lower income employees is not to be introduced fully until 2016, a year later than originally planned.

The personal accounts scheme, which will seek to provide better retirement provision for those on low to medium wages, was to have been phased in over three years from 2012.

However, the Department for Work and Pensions (DWP) has announced that employers are to be granted an extra year in which to ready themselves for the scheme.

Personal accounts are intended to help the estimated nine million workers who do not at present have occupational pensions. The scheme will see employees, in the absence of a company provided pension, enrolled automatically. Workers will be required to contribute around 5 per cent of their salaries to the pension fund, with employers making a 3 per cent contribution.

The latest timetable suggests that employer contributions will be phased at 1 per cent in 2012 before reaching 2 per cent in 2015 and 3 per cent in 2016.

Larger firms will be obliged to implement automatic enrolment ahead of SMEs.

The DWP said: “The first transitional period, in which employers pay 1 per cent, will last for the duration of the three-year staging period up to September 2015. Employer contributions will then move up to 2 per cent in October 2015 and up to 3 per cent from October 2016.”

A DWP spokesman added: “A 36-month staging period strikes the right balance between getting people into saving as quickly as possible and minimising the operational risks associated with the reforms. In developing this policy, we have been mindful of likely stakeholder concerns and taken them into account as far as possible.”

The move, however, has attracted criticism.

Maggie Craig, director of savings at the Association of British Insurers (ABI), argued that it was always known that some phasing of the Pensions Act was necessary. But she described the four-year delay before contributions rise to 3 per cent as unacceptable.

Ms Craig said: “It means that no employer will have to pay more than 1 per cent until October 2015 – the rate of saving for people in the scheme will move at the pace of the slowest.”

She identified a further risk: “As things stand, employers may be encouraged to ditch private schemes, which benefit from higher contributions, in favour of the state-backed scheme where they could pay just 1 per cent for at least three years, with government approval.

“So, at a time when Britain is not saving enough, the crucial first few years of the new system will see less saving. We urge the government to think again on these unacceptable regulations, in the interests of Britain’s current and future savers.”

Ms Craig’s views were backed by a survey carried out by the Association of Consulting Actuaries (ACA).

The poll of 300 firms with fewer than 250 employees found that almost half (41 per cent) said they were looking at dropping their own workplace pension schemes in favour of the new personal accounts.

More than half (54 per cent) indicated they were planning to revise the pension benefits they already offer in order to compensate for the added costs of enrolling all of their employees into their existing schemes.

Keith Barton, the chairman of the ACA, said: “While we support the government’s ambition to encourage wider pension coverage through auto-enrolment and personal accounts, the survey highlights the complete absence of a coherent plan to support existing quality schemes. The message is clear – good schemes are falling under threat from these well-intentioned reforms.”

The DWP responded by pointing out that there has been a market failure to provide pensions for moderate and low earners.

A spokesman commented: “Our reforms will result in between 6 million and 9 million people saving in a workplace pension, many for the first time.

“The personal accounts scheme is designed to complement not compete with existing pension provision. We want to get the details right and keep costs low so we’ll continue to talk to employers and stakeholders and are consulting on key regulations.”

There was critcism of a different kind from the British Chambers of Commerce (BCC).

While welcoming the government’s shift on timings, the BCC said that the expense of the scheme to small businesses has been downplayed.

Adam Marshall, the BCC’s director of policy, commented: “We are pleased that the government has acted on our initial concern that the regulations were too prescriptive and costly, and have made substantial changes to address this. However, they are still hugely underestimating the cost of these reforms to small businesses.

“Government needs to start thinking about these changes in their totality. Taken together, these reforms, the Agency Workers Directive and the planned increase in National Insurance contributions in 2011, represent significant new costs to business at a time when economic growth and job creation will be key to recovery. Automatic enrollment alone will cost businesses £5.6 billion a year – so pension reform must be continually reviewed on this basis.”

The government is running a second consultation on its pension reforms and wants to hear views on scheme self-certification, the qualification criteria for pension schemes and requirements to provide employees with information on auto-enrolment.

The consultation will close on 5 November 2009, and more details can be found at www.dwp.gov.uk/consultations