The levelling-down of pension schemes
A fair bit’s been written lately about the serious concerns many have with regard to the implementation of the National Pension Savings Scheme (the NPSS), or Pension Accounts, that the Government has been going on about since it apparently got bored with the A-Day changes. The main worries are that by setting a 3% compulsory employer contribution to the new scheme the Government would be establishing a very low benchmark compared to the average existing scheme and by bringing in auto-enrolment at the same time they run the risk of lumping additional and high costs across the board onto employers all of a sudden. Naturally employer groups are concerned about that. On the one hand trade bodies like the National Association of Pension Funds (the NAPF) are saying the consequences of Government getting this wrong “could be catastrophic”, whereas on the other hand the Department for Work and Pensions (the DWP) have commissioned research that says we’ve got nothing to worry about.*
You’ll have read about that research on the BeeHive last week if you tuned in Strong support from employers for automatic-enrolment (in case you missed it), and many BeeLiners wrote in to say what they thought about the Government’s relaxed attitude to the forthcoming disruption that will be caused by implementing yet another big idea on the pension front before the dust has even settled on the last one. I can go one better than that today though by publishing the results of the latest BeeHive poll that we’ve had running on the Home Page for the last few weeks or so. That serendipitous poll asked BeeHive users how they thought the introduction of the NPSS could affect existing workplace pension arrangements.
The poll was aimed at advisers who work day in, day out with employers running pension schemes for their employees and asked if the advent of the NPSS would:
- have no effect on existing schemes
- lead to employers reducing their contributions to existing schemes
- lead to employers increasing their contributions to existing schemes
The results of the poll were that 14% of respondents thought it would have no effect; a massive 86% thought it would lead to a reduction in contributions for existing schemes; and an emphatic 0% thought it would lead to increased contributions in existing schemes.
That leads me to think that if people at the sharp end of pensions feel that’s how their corporate clients will react, then that’s probably what will happen if the Government goes ahead with its current proposals. As usual many respondents added in their reasoning to go along with their vote in the poll and I’ve include a representative sample here for you to browse:
“If the proposals include no leeway for existing schemes with more generous employer contributions, I have no doubt these schemes will close, and employers will pay the minimum amount required to the NPSS.”
“The extra costs for some employers will make them less profitable and competitive at a stroke and so more likely to cease providing employment opportunities. Other employers will see it as an encouragement to move to Defined Contribution arrangements, probably GPPs at a lower cost, improving their competitiveness and profitability but in all likelihood not increasing employment opportunities. Overall, fewer in work and poorer pensions for those remaining in work, not what the doctor ordered!”
“Employers are already looking at it as a way to reduce their pension costs. Why should they pay more when the Government is saying 3% is enough?”
“We run many GPPs where the employer contribution is in excess of 3%, quite often in the region of 5-10%. When they learn of the 3% requirement inevitably Finance Directors and the like will question why they are being so generous with staff pensions.”
“Most common scenario will be to go for the ‘Government approved’ level of funding. If current funding isn’t cut for existing staff, it almost certainly will be for future employees as the employer’s offering will be NPSS only.”
“Good excuse for a lot of employers to demonstrate they are providing what’s been asked of them and nothing more.”
“Most schemes are more generous than NPSS levels and employers will just regard NPSS as ‘Son of Stakeholder’ - we’ll do one as we don’t want to alter the eligibility for our main scheme. This time, however, it’ll cost the employer something if anyone joins his NPSS shell. Let’s not forget, though, that the NPSS is really aimed at all those thousands of very small employers with a few lower and middle-earning employees and no current pension provision. Even with phasing-in and maybe some other Government help, the commercial realities may be that some (many?) of these employers will quietly ‘encourage’ employees to opt-out of the NPSS as soon as they’re put in it - unless they want a wage decrease.”
“Any contribution figure set out by government will be seen as being ‘sufficient’ by many employers who may well be paying more at present (many contribute at 5 or 6%). The view may well be that by setting a contribution level of 3%, the government are in effect saying that that level of contribution is sufficient and there is therefore no need to pay more.”
“Many employers are now looking for any excuse to reduce their contributions and now they are now being handed the ideal excuse by the Government.”
“Although many companies, particularly those that are unionised, may continue with more generous longstanding occupational schemes, one has only to look back at what happened to scheme funding levels and transfer value bases when the Minimum Funding Requirement was introduced. It stands to reason that, if the Government sets a compulsory 3% employer contribution rate, the Government must believe that such a contribution is adequate – otherwise why set it? Some companies will, therefore, use that as justification to reduce their level of provision.”
“A number of corporate clients have already intimated that they will reduce contributions.”
And so it goes on…
That last two really ought to set alarm bells ringing in Government circles in my opinion; it’s a bit worrying that the views of advisers as expressed in the BeeHive poll seem to be so at odds with the views of employers expressed in the recent poll by the DWP. Me, I’d go with what advisers think. But what do I know about all this pension stuff?
To help me with my imperfect knowledge though, I thought it’d be good to put up yet another poll on the BeeHive Home Page today. This time the question is as follows:
Which of today’s big pension issues are causing you and your clients the most problems at the moment?
a) The A-Day changes that came into force on 6th April 2006
b) The Government’s White Paper on further pension reform due in Autumn 2006
c) The new age-discrimination laws coming into force on 1st October 2006
All very different topics, I know, but in practical terms which one is it that is taking up your and your clients’ time this year? Getting to vote in the poll couldn’t be easier, just click on the following link and put in your two-pence worth The BeeHive - pensions gobbledegook explained. Adding in a few comments would be good too - they’re always the best bits of these polls and get plenty of interest from financial journalists and the like. As usual the deal is you tell us what you think and I’ll make sure financial journalists get fed up with hearing about it. It’s evidently a failing of mine, and one that I’ve no intention of putting right…
14 August 2006
*Source - NAPF Policywatch dated 11 August 2006.
Planet Stakeholder cartoons first appeared in Pensions Week on 13 March 2006 and 31 July 2006 respectively.
Results and comments are based on 156 responses to BeeHive poll received from 7 July 2006, 17.06 pm to 9 August 2006, 16.40pm. Actual results have been rounded to whole numbers.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.