At the moment there are about 100,000 workplace pension schemes in the UK. The auto-enrolment regulations set to come in from 2012 will affect 1.1 million employers. In the phasing period of the new reforms from October 2012 through to September 2016 we will therefore see the genesis of about one million new workplace pension schemes in this country. To put that another way; if you had the time to travel around the UK today interviewing all employers you would find about a million of them who have no workplace pension scheme or schemes in place for their employees; if you were able to repeat the process at the end of 2016 you would likely find none.
The new reforms are doing two main things really. The first is a complete revision of what the state pension system does and is for. The Basic State Pension was worth around 25 per cent of average earnings back in the 1960s, but today is worth something like 14 per cent. It is pre-programmed to be worth less and less as time goes on and if left that way would eventually become just that, worthless. The reforms are designed to stop the rot in the basic pension. That doesn’t mean that the pension will increase in real terms in the future, but it should mean it will stop getting worse year-on-year.
It is the change to the State Second Pension (S2P) however, that is the most fundamental. Since 1961 the state has provided a second-tier pension for employees whose employers have not provided qualifying workplace pension schemes. The original state-run workplace pension scheme back in the 1960s was called the Graduated Pension scheme. That was replaced in the late 1970s by the State earnings-Related Pension Scheme (Serps) which was itself replaced at the beginning of the new century by the State Second Pension (S2P). These second pensions provided through the machinery of the National Insurance system produced earnings-related workplace pension entitlements in return for earnings-related National Insurance contributions. Following these new reforms the State Second Pension entitlements earned in future will gradually become flat rate.
This is a fundamental change that effectively marks the end of a 50 year experiment with the State providing workplace pensions for employees on top of employees’ basic pension entitlements. The loss of this tranche of workplace pension provision for millions of employees is to be replaced by a requirement that employers enrol their eligible employees into qualifying workplace pension schemes. As a result we now find ourselves in the entirely new situation where employers will be required by law to provide a funded, private-sector workplace pension scheme for their employees.
The reforms are designed to stop the rot in the basic pension. That doesn’t mean the pension will increase in real terms in the future, but it should mean it will stop getting worse year-on-year
The new responsibilities laid on employers are not generally known about yet, but every business in the UK has already been allocated a staging date (between October 2012 and September 2016) by when they must comply with the new regulations. All existing workplace pension schemes will need to undertake an audit to establish where they are in terms of compliance with the new regime. Meeting the standards for qualifying schemes will prove a challenge to many existing schemes.
But the big challenge will come for the million or so employers who do not and never have run pension schemes for their employees. It is likely that many of them, perhaps hundreds of thousands, will choose the default qualifying scheme that is being established by the Personal Accounts Delivery Authority – the National Employment Savings Trust. Other employers may also simply comply with the minimum contribution level required by the legislation by setting up their own basic qualifying schemes. But some of the million employers affected will surely look at the requirement to have a pension scheme differently to that.
If they are required to have a pension scheme anyway it would seem a sensible time for employers to sit down with their employees and work out just what it is they want a pension scheme to do for them. There will, of course, be a role for the corporate platforms everyone is talking about these days, but I think they will in reality turn out to be more employer-centric than the re-jigged flex benefit systems I keep hearing about.
In the next six years all the private-sector pension schemes of the future will have been built. It will be interesting to see how many of them will be built with the idea of providing decent pension outcomes for employees and how many to simply comply with the minimum requirements of the legislation.