Private sector workers will need a pension nest egg
Of over 550,000 private sector employees only a very small proportion are building a personal pension fund which offers an income in retirement high enough to maintain living standards comparable to even half of earnings at work. Retirement will mean lower living standards.
The official state old age pension, coupled with the means tested supplementary pension, sets minimum standards. Government, however, does not claim that the official old age pension is, on its own, an adequate pension. As a response, the Government has tabled legislation that is designed to encourage people to save more for retirement.
All employees will automatically be enrolled in the new statutory savings scheme. Once enrolled, they would have discretion to opt out. From 2012, unless an employer has their own approved scheme, private sector employers will be required to enrol all employees (earning more than the threshold, currently about £7,500 pa) in the National Employment Savings Trust (NEST) where the employee will, as a minimum, contribute 4% of earnings alongside 3% from the employer and 1% in tax relief: a minimum of 8% of earnings. Government sees NEST as an incentivised form of personal saving.
The contribution rates are modest. Local pensions experts Kerr Henderson point out that a person contributing from the age of 30 and earning £20,000 pa, would accrue at retirement an income of only £2,000 pa. Phil Murray argues that “NEST should not be seen as a substitute for good quality pension provision”.
Nevertheless, pension experts do welcome the NEST idea. Stuart Faloon, principal in Mercer’s Belfast office, suggests, partly as a response to the low current level of participation in pension schemes, that NEST offers “a pension scheme of last resort to act as the auto-enrolment option for those employers that do not have the means or desire to engage with [a] private sector provider. ..we welcome the news that NEST will be allowed to fill this role”.
There are doubts about the new scheme. Will employers widen or enhance existing pension schemes? Alternatively, will some employers, as they widen existing schemes which do not apply to all employees, be tempted to reduce the scale of provision to minimise the cost of the change?
A special study of employer pension costs for 150 of Northern Ireland’s larger businesses shows that pension provision (usually through a defined contribution scheme) costs less than 3% of the pay bill in 51% of these firms. When allowance is made for the loading of pension contributions towards high earners, this confirms that the minimum 3% employer contribution to NEST will be a big change for many.
The big unknown is whether many employees will opt-out and forgo the matching funding from the employer and the tax system. Stuart Faloon of Mercers believes that in the early days there will be lower opt outs but this may rise when the scheme is fully in place by 2017. At Kerr Henderson, Phil Murray has concerns that the opt-outs may be larger than the Government expects. “In the current period of austerity .. [opt-outs] are likely to be higher than originally envisaged. Also, people who are on lower pay levels may opt-out if their saving may only replace the means tested pensions benefit that they would otherwise receive.”
For all employers, the arrival of NEST means that employee pension arrangements must be reviewed. Existing defined contribution schemes may either be extended to take more members and avoid the need to enrol in NEST, or might be wound down.
In the largest 150 private companies here, 46 still have some defined benefit employees but 35 of these registered an actuarial deficit last year. Some may close.
From Mercers “the fundamental principal remains that employees need to save [more] for their retirement”. From Kerr Henderson, “employers will need to start budgeting for more employees joining their scheme or being enrolled in NEST”. Whatever else, the pensions advisers will have more work to do!