Many EEF members will be breathing a sigh of relief having overcome the challenges of auto-enrolment. Auto-enrolment has been a major cost and challenge for manufacturers, even though three-quarters of them already had some form of occupational pension provision. Businesses have had to absorb many costly business process changes, and HR professionals now have to look forward to their continuing duties, re-enrolling workers who opted out and dealing with new-starters. For them, some of what's written here will not be good news.
EEF supported the principle of auto-enrolment, was critical of some of the process, but its useful to remind ourselves of why we are where we are. In the UK, we have an ageing population – life expectancy is increasing, and we have a pay-as-you-go state pension. In other words, what today's workers pay in by way of national insurance, is paid out again to today's pensioners. There is no national pension saving scheme. But as life expectancy increases, pensions, including the state pension need to stretch ever further. There are only two answers – pay in more to your pension and work longer.
This is why in additional to auto-enrolment, employers need to get ready for a raft of pensions changes, many of which will come into force before the end of 2015.
Auto-enrolment will inevitably create a huge number of small pension pots. Every time a worker moves jobs, they will in all probability leave one pension and join another. Lots of small pension pots give poor value to the worker, so Government has come up with a scheme called “pot-follows-member”. What this means, simply, is that when a worker joins a new employer, their existing auto-enrolment pension pot will follow them to the new scheme. For employers, it's going to mean more administration and more questions from their workers. Is it always in the worker's interests to move their pot? How will it be valued? What if the worker doesn't want to move their pot, but then later changes their mind? Employers will need to be ready for the changes – most won't know anything about the changes, yet.
But “pot-follows-member” is only one of a number of changes on the way.
What about the Budget announcements?
The budget heralded seismic changes in the way that workers can draw down their pension fund, allowing them much greater flexibility to decide what they do with it and what they spend it on. No longer is the annuity the only game in town for most. Manufacturers have an ageing workforce – for many businesses over half their workforce is over 50.
What will this mean?
Could it mean a rash of highly-skilled engineers retiring next year – there is no default retirement age, so workers can for the most part decide for themselves when they leave. What would this mean for the skills shortage? Or will workers save as much as they can, stay on later, and then buy a luxury car or travel the world on the back of their pension pot. The wider economic impact of this change are equally unclear – pension funds are major investors – if workers en masse draw down their pension savings, what will this mean for investment?
Currently, for workers with a defined contribution pension pot, the current average value is under £50k – no-where near enough to retire on (Back to working longer and saving much more.)
Employers will also be forgiven for not spotting administrative changes which the Government has announced. New rules to ensure that pension schemes are better managed are on the way, and pension charges are to be capped. Whilst this may be in the long term interests of workers and employers, short-term, many businesses will see this as constant change.
Sure you know everything about pension reform?
And lastly, how many employers know about state pension reform? The second state pension, (to many SERPS or S2P), is to be abolished, and a single tier state pension introduced. But in today's money, it will only be worth around £144 a week. The state pension age is to rise again in the future – 68, with every chance that as life expectancy increases, the state pension age will as well. Undoubtedly, for many, the response will be simple – work longer.
For employers, the message is clear – these changes are as large as auto-enrolment – be ready for them and think, again, about how you manage older workers.