In January we received the final batch of regulations to deliver the 2012 pension reforms, which provide more certainty to help advisers and employers with their planning process. And even if we have a change in Government, the backbone of these reforms will proceed. So advisers working in the corporate market can start to concentrate on the significant business opportunities which are approaching.
Recent DWP analysis¹ shows that 750,000 employers – nearly 60% of UK companies – have no pension scheme at all. All of these companies will need help in working out how they fulfil their responsibilities, and the impact the reforms will have on their business. A further 280,000 employers currently pay less than 3% to a pension for their employees. While that may be sufficient during the phasing-in period, these employers will still need to make early amendments to their schemes. For example, automatically enrolling all qualifying workers, and ensuring a suitable default investment fund is in place. And by 2016 or 2017, payment levels will need to increase as well.
The remaining 270,000 UK employers currently pay 3% or more to a pension scheme. But even these employers may need to make changes to their scheme. For example, some of these schemes will not have the full 8% contribution, meaning either employee or employer payments will need to increase in future.
HR directors will want help. For example, working out what type of new scheme to introduce or the changes required to an existing scheme. But there are many more areas where employers will need assistance whether they have a scheme or not – which workers need to be enrolled; when do they need to communicate with employees; what do they have to tell them; what default fund is suitable for their workforce.
But Finance Directors will also want help, and their main concern will be around increasing costs. These may be driven up by the minimum contribution levels, extending pension provision to all workers, and the fact that auto-enrolment will increase ongoing membership. Merely quantifying the extra cost and the timescale a particular employer faces will undoubtedly help them. But they key is helping finance directors find solutions for offsetting these additional costs. And the earlier employers and advisers start to consider the impact, the more options there will be. For example, reducing planned salary rises slightly in the next four or five years may create sufficient savings to offset the increasing pension costs – which may be preferable to redundancies or shrinking profit margins.
Where you already have a relationship with an employer, you are in pole position to help. But there are thousands more employers who currently have no adviser. Larger companies are key targets and it’s clear these will need help. For example, ensuring their arrangements encompass all workers, and dealing with the processes around automatic enrolment and refunds for those who opt-out. However, many affected companies are smaller and, at first sight, may appear less commercially attractive. But business models can be developed in this area – for instance, providing consultancy reports outlining how the reforms will affect a particular employer, or helping them implement the necessary administration and compliance procedures.
While pension reform seems to have been around for a long time, we shouldn’t overlook the impact. Over the next five or six years, the number of pension schemes in the UK will increase considerably, all existing schemes are likely to have more members, and employers face increasing administration and compliance responsibilities. This brings massive opportunities for the strategic development of your business.
¹ DWP Workplace Pension reforms impact assessment, 12 January 2010