What’s the impact of longer working lives on an employer’s benefits scheme?



A recent YouGov poll for the Department for Work and Pensions (DWP) (the full results of which can be found here) showed that the main reason for continuing to work was ‘needing’ to earn money (31%). This statistic resonates with our work with employers. 

Since it has been unlawful to force people to retire unless there are objectively justifiable reasons for doing so (age discrimination), people continuing to work beyond traditional retirement age are becoming a primary consideration for businesses when it comes to succession planning and the provision of benefits.

The fact that nearly half (49%) of those polled now think that they will retire later than they thought they would goes to suggest that this issue is something that is likely to gain momentum.

The key questions from the employers we work with are: “how can our benefits package accommodate the diversity of our workforce?” and “how do we pay for it?”.

The cost of employee benefits can escalate (sometimes rapidly) as cover is provided beyond a traditional retirement age.  As a result, many employers utilise the exception to the principle of equal treatment on the grounds of age for group risk insured benefits, while other employers continue to fund ongoing insured benefits.

As the responsibility appears to continue to shift from government to employer, and then on to employees to fund benefits, it is likely that the use of flexible (and voluntary) benefits will continue to grow at a pace.

 
Whatever the future holds, making sure that employees fully understand and appreciate the benefits on offer is key to an employer’s staff reward and commercial success.

Robin Watkins

Risk & Flexible Benefits Consultant

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Declaration of Compliance Process - Important?

Employers who pass their assigned staging date to commence the automatic enrolment process need to be aware that their responsibilities do not end once they have finished automatically enrolling their employees.

The regulatory body (the Pension’s Regulator http://www.thepensionsregulator.gov.uk/) has a very specific mandate from central government to encourage employers to have an ongoing involvement and a visible engagement process after their automatic enrolment process has completed.

One specific arm of this mandate is the declaration of compliance process (DOC).

The DOC is a method by which the employer confirms that the scheme that it operates is fully compliant with the standards set out by the Pensions Regulatory body. Employers are required to complete this every three years, in tandem with their re-enrolment of those employees who were not automatically enrolled at the assigned date.

After the assigned date, there is a very small window for the employer to complete their DOC using the Pensions Regulator’s website and if the DOC is not completed in this time, then the regulatory body has jurisdiction to levy fines on defaulting employers.

An important part of this process is to educate employers as to the ongoing role of the Pensions Regulator, beyond the role that it plays in the run up to automatic enrolment.  The DOC remains an employer’s responsibility but it is the responsibility of every financial advisor to ensure that the employer is aware of what is required as part of this process and their ongoing role within it.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Importance of Good Employee Communication

With the changes in pension’s legislation, more employees than ever are being automatically enrolled into pension schemes with their respective employers.  Employees who are affected by this are often unaware of these changes and the potential benefits or implications of being involved in such a process.

There is a distinct knowledge gap between an employee’s idea of what their pension should be and the actual reality of the workplace pension that is offered. The engaged employer should be aware of this knowledge gap utilising many forms of media to engage with its employees.
Communications can take several forms from employee facing booklets to presentations made by product providers or financial planning consultants. With all of these methods it is important to keep in mind the three prime concerns of every employee: What do I have to contribute? What will I receive at my retirement? How much will I pay for this additional benefit?

Financial planning consultants can liaise with their clients to tailor the best delivery method to effectively engage with their employee demographic. Answering questions early and definitively provides a more stable grounding for employee engagement in the pensions process. There will always be issues which will be encountered over the employee’s time within the pension but the likelihood of the same queries and questions occurring can be decreased considerably by good employee communication and engagement.

Robert Simmons

Corporate Pensions Administrator

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The DWP’s announcement on commission, what does it mean for your scheme?

In March 2014 the Government announced a number of changes to the pension system to improve workplace pensions for employees. These changes affect both employer and employee to some degree, and the biggest change that will affect employers is the removal of commission payments to financial advisers.

In the past, many employer-based pension schemes were set up to pay commission at both scheme level and new employee level. This would cover things like scheme reviews, ongoing payments, new joiners and governance meetings. All of which could be covered by commission overall payments received in respect of the scheme.

This is set to change when initial and trail commission are removed in November 2014 and April 2015 respectively. Payments will cease and most advisers will have to review the position with the employers they service.

In most cases, this will likely result in moving to a fee based retainer to cover the services which would have previously been covered by commission.  

Employers affected by these changes need to revaluate the services they are receiving from financial advisers to make a judgement as to whether their fees are appropriate to the level and quality of services being provided.

Robert Simmons
Corporate Pensions Administrator
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

The Previous Pension Minefield - A Survivors Guide

In today's modern workplace individuals change employer ever more frequently so that an individual may change employer numerous times during his/her working life. The days of a 'job for life' that the previous generations enjoyed are long gone.

In most cases, individuals moving employer have pension benefits with their former employers.

With pension transfers becoming more common, employees with benefits in old pension schemes from former employers may decide to transfer these benefits to pension schemes run by their current employer. This can serve to eliminate the additional administration that can result on an employee’s retirement.

In recent years, the Financial Conduct Authority and the Pensions Regulator have heavily scrutinised the area of pension transfers and have especially highlighted the need for good quality advice in this area.

Mindful of this need for greater transparency, many of today’s pension providers will not consider the transfer of benefits for any employee until they receive financial advice from an independent financial adviser. Others will not allow transfers without employer consent.

Employees may be unaware of the value of their pension ‘pots’ and the potential minefield that they may be stepping into when seeking to transfer benefits. Many previous pension schemes may have additional (hidden) benefits that may be lost on transfer to their current employer’s scheme.

As advisers, it is important for us to be mindful of these benefits when reviewing  the previous pension arrangement of a corporate employee and understand when a line is crossed from providing mere factual information and explanation and veering into the area of individual ‘advice’..

Robert Simmons
Corporate Pensions Administrator
Telephone: (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

 

Will April's pension freedoms throw your automatic enrolment scheme off the tracks?

Doesn’t it seem like your automatic enrolment journey is finally chugging along nicely? At the start there was the surprise of just how many new processes you had to learn and how much administration time it seemed to take up. Yet now your consultant has helped you understand those things you thought you knew then realised you didn’t, and finally the whole assessment piece is just a few new employees a month which is taking an hour rather than a day. Your enrolled employees even appear to be engaged and talking about the benefit to them. This auto enrolment thing is easy!

Now we know in order to keep it so we always need to keep one eye on the future and consider how it will affect your company’s scheme. We’ve talked in previous blogs about what the new pension freedoms proposed for April 2015 will mean for your employees, but are there things for the employer to consider?

One thing stands out to me. What happens if an existing employee of 55 or over decides to access their company pension but not retire from work?

Further questions flow from there: Are you aware of whether or not you will need to re-enrol them in to your company scheme? Are your employees aware of the impact this could have on their tax position or what will happen if they use all their savings up? Accessing their pension could reduce their annual contribution allowance to £10,000, do they know this and what are your responsibilities as the employer? What does this mean if you have a salary exchange scheme up and running?

Finally of course is the question your employees will ask you in a couple of months’ time – “Does our pension scheme provide access to facilities to allow all the new pension freedoms in April?”

You may not have heard, but the majority currently don’t….

Now is the time to start thinking about the new freedoms coming in April and how you can keep your automatic enrolment scheme on the right track.
  

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstone.co.uk

 

Hearts and Minds – The Importance of the Guidance Guarantee

The Government and the Financial Conduct Authority are currently working on the outline for the Guidance Guarantee, the free help offered by the Government to those wishing to access their pension funds.

However, vested interests will cloud the implementation of the Guidance Guarantee and it must stay on course to provide the best it can.

What six attributes must it have to be a success?

1. It must be independent of Government and providers. Both are tainted by a lack of trust amongst the general public and so Guidance must stand alone to be trusted. This means the provision and branding are separate and recognisable.
2. There must be a recognition that individuals will not have the knowledge to fully understand the information they will be given and, therefore, the process must include a period of education via the employer if necessary.
3. Where there is no employer to act as a conduit per se, for example people who are self-employed or no longer in employment, the scope of the required learning must be made available to them. Equally those without a paternalistic or engaged employer.
4. What must be clear is what the Guidance is and what it isn’t. Guidance is a provision of information and an opportunity to take stock of where one is. Clarity of what it can and cannot do will help manage expectations with the eventual outcomes.
5. This may not be the final step during the decision making process and next steps must be clear and if professional advice is needed then this must be included (albeit at a cost to the individual).
6. It must proactive and forthcoming with information and not rely heavily on individual initiative. As shown with the success of auto enrolment in increasing scheme membership, inertia will grip many and confusion should not be allowed to paralyse individuals into non-action or the wrong product.

    David Brooks

    Technical Consultant

    Telephone: +44 (0)20 7893 3456

    Email: contactus [@] broadstone.co.uk 

We're all in - well not yet, but we want to be!

Latest figures from The Pensions Regulator (tPR) indicate that more than 5 million additional employees have been enrolled into an employer’s pension scheme since automatic enrolment legislation came into effect.  Now that large and most medium-sized organisations automatically enrol staff into a Workplace Pension scheme, smaller employers are increasingly coming under pressure from existing and particularly new employees who expect to benefit from pension membership.  This has led to us seeing an increase in the number of requests from employers who say they want to bring their staging date forward.

Other reasons for bringing the staging date forward are to align the start of automatic enrolment with annual pay reviews; the company’s new financial year; the flexible benefit scheme ‘window’; or simply a less busy time of year that better suits the business.

 

Before embarking on this course, however, it is important that both the company and the pension provider will have sufficient time to prepare and can accommodate the reduced timescale. This is important because once the employer informs tPR that it will be bringing the staging date forward then it cannot be moved back. Earlier available staging dates are listed here.

 

What clients don’t always appreciate is that they could launch and start their pension early on a voluntary basis (i.e. a ‘soft launch’) and then automatically enrol remaining staff at their original staging date. 

 

The soft launch enables an employer to benefit from considerable employee goodwill (if communicated effectively) as a result of starting pension contributions early; defers the contribution cost for any employees who do not join voluntarily at outset, and allows extra time for automatic enrolment to be communicated to staff in advance of the staging date so that it comes as no surprise to existing employees.  

 

Ian Willans
Business Development Consultant
Telephone: +44 (0)20 7893 3456
Email: contactus [@] broadstoneltd.co.uk

Coming out as "protectionist"

With the Labour party toying with the politically risky idea of rolling back the new pension flexibilities it is perhaps a good time to consider where we may be going.

The success of the flexibility and freedom of choice for all with their pension assets hinges on the quality of the guidance AND advice that individuals receive. Everyone in the industry can already tell you that a form of generic guidance will be insufficient for the majority to make the right decision and will come down to chance without the correct appreciation of the risks. Without an appreciation of the risks many will experience poor and disappointing outcomes. With flexibility and freedom comes a bewildering array of choice and complication and the opportunity for mis-selling and further devaluation of pension savings.

If the first step on the path to advice is guidance, albeit restricted to pensions assets, then this will give us the greater chance to see better outcomes for members.

However, for this to succeed financial education needs to be increased at all levels. Employers should be encouraged, on a safe harbour basis, to provide financial education to all staff, from new joiners to those looking to leave and move into retirement. Schools need to engage with charities like MyBnk and the like to start the cultural change to financial literacy, knowledge and understanding across the board.

We must recall, and not forget, that drawdown was described just weeks before the 2014 Budget as a highly sophisticated product only suitable for wealthy investors. Drawdown is complicated and a minefield for laypeople to address alone. With this the prospect of pensioner penury is a very real one.

On one hand many people are naturally frugal and the argument exists that they may live on too little to keep what they have. However, many will spend too fast too soon and run out of money and fall on the state.

By retaining an income requirement a level of guaranteed income, a safety net remains, with full flexibility allowed for benefits in excess of this.

However, continuing with complicated rules does also devalue pensions and almost certainly results in individuals being forced into buying annuities at a time when they do not give the best value. Although with improvements in longevity many will still win this bet.

So, on balance I believe that a brake should be applied to the flexibilities:

 

1.   Delay the introduction of full flexibility (see 2) for the process and guidance to be properly introduced. Allow capped drawdown, as now, without triggering the Money Purchase Annual Allowance

2.   Continue the Minimum Income Requirement (MIR) for flexi-access drawdown at £12,000 pa.

3.   Continue with the small pots solution, indexed with Consumer Price Index (CPI) so members with small funds can still receive these where the MIR is not reached

4.   Increase the Minimum Pension Age (MPA) to 60 (for flexible access) to prevent early depletion of funds

From conversations across the industry and it appears their two broad camps exist. One in support of the full reach of the freedoms, with the clear upside for many. The other, as I am, proposing a check to this trajectory, mindful of the potential for significant downsides… the debate will continue.

 

David Brooks

Technical Consultant

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstoneltd.co.uk

The Whirlwind that is Pension Reforms

Last week saw the publication of the Taxation of Pensions Bill in which we expect to find further clarification on the Chancellor’s proposed changes from April 2015.

The most eagerly anticipated of which is that individuals will be able to access the ‘tax-free’ lump sum from their (Defined Contribution) pensions as and when they want from age 55. This is a big change from the current rules which require ‘tax-free’ lump sums to be taken within 18 months of a member becoming eligible for their pension income.

We broadly support the Government’s proposals, however we question whether it is wise to encourage people to view their pensions as ‘bank accounts’, as this could result in a nasty surprise for some people when they incur higher than anticipated tax charges (up to 45%) when drawing from their pensions.

It is therefore essential that the public do not view their pension as ‘bank accounts’ as the two structures have virtually no similarities.

We are concerned that the Government’s shake up has not given due consideration to increased life expectancies, long term care, and investment risk amongst others. These issues pose problems to most professional advisers, so how does the Chancellor propose to protect inexperienced investors from making the wrong choices?

The proposed changes are only likely to be accessible to people who are invested in pension arrangements which are prepared to embrace the new changes. In reality most pensions will choose not to amend their current rules, meaning that large numbers of people are unlikely to be able to take advantage of these changes without transferring into some kind of alternative pension arrangement which has chosen to adopt the new rules. This is definitely an area where independent and impartial advice will need to be sought. Clients should be very careful and very wary when considering any pension wrapper .The new rules do not change this reality.

My personal view is that the proposed changes are likely to cause very few problems in the short to medium term, however this could cause problems for future governments if forthcoming generations choose not to make adequate provision for their own retirement.

Finally we would encourage the Chancellor to consider introducing some form of safeguard in order to help protect those who cannot afford to make the wrong decisions. If they don’t, then we may well see a rise in the number of people who become solely reliant on the state in old age. 

Philip Sutton
Senior Consultant
Telephone: +44 (0)20 7893 3456
Email: getintouch [at] broadstoneltd.co.uk