Government takes steps forward in addressing our pension challenges…but a few more to go

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This week saw the Pensions Minister, Steve Webb MP announce the long awaited reform of the UK's state pension. The announcement was a major step forward in addressing our key pension challenges.

The proposals will have significant, far-reaching and long lasting effects upon employers and workers, and as such business leaders will have to prepare now for the changes which are to take effect.

Without change in the state pension, the UK faces challenges in pension provision which will in time be impossible to overcome.

The numbers of workers saving in occupational pensions have fallen significantly, life expectancy has lengthened and workers face long retirement periods without an adequate income. This would mean higher taxes on individuals and businesses as provision for the UK's pensioners falls upon the working population.

A simple, more generous state pension will be a major boost for auto-enrolment by giving employees much greater certainty that is worth saving for their retirement. In turn this will help employers play a crucial role in helping their employees secure decent incomes in retirement.

So what is on offer and will there be winners and losers?

The current complex state pension will be simplified into a single tier, worth £144 today. The winners will be women and carers who will receive national insurance credits whilst not in work. The losers will be higher-earners who will pay in more and get less out and the young who are likely to have been better offer under the previous scheme.

What do employers need to do now?

Individuals, including employers, will need to accumulate 35 years' of NI contributions to be eligible for the full state pension. The DWP will set a lower contribution limit of between 7 and 10 years of contributions, below which no pension will be payable. Above this level, a proportion of the state pension will be paid.

The announcements this week will allow employers to mitigate the loss of contracting out relief but will need to act now. Employers with contracted out defined benefit (DB) schemes will face an increase in their national insurance contributions of 3.4%. The DWP estimate that as many as 80% of workers will, at some point, have been in one of the affected schemes.

Employers currently operating such a scheme will have a time-limited opportunity to adjust their pension scheme rules to compensate for the additional NI contributions which they will have to make.

Whilst the details have yet to be published, this is likely to allow employers to reduce member benefits or seek greater contributions – this is a significant concession which EEF has long campaigned for.

Whilst there are some clear wins for the manufacturing industry there is still work to do on wider pension reform including making auto-enrolment fit for purpose by removing the current restrictions on contributions.


Media Team 020 7654 1576

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