I WAS asked recently to continue to
bring some humour to the veterinary
press via this column. Last month I
chose to write about a library and
this week I am writing about
pensions.
This is not a very funny subject and
the news I am reporting will not bring a
smile to many employers’ faces. So you
may have to get your laughs elsewhere
this month I am afraid.
It’s not all bad news though and
these things are often a matter of
perspective. I could
lead off with a variety of headlines so I’ll let
you take your pick
from the selection
below depending on
your status as
employer/employee
and age.
For the new graduates
and younger vets and nurses
and lay staff: “Great
news, your pension and
retirement income is
[possibly] assured,
employers are finally
obliged to enrol you in
a pension scheme and
help you contribute to
it.”
For the same people and other employees:
“Terrible news, your pension and
retirement income is assured, employers
are finally obliged to enrol you in a
pension scheme and help you contribute
to it… By the way that means your
employers can’t afford to give you a pay
rise next year (or any year until 2017).”
- For employers: “Great news, feel good
as you help fund your employees’
retirement (but feel bad as you have to
raise prices and cut wages to do it)”; or
“Terrible news, more red tape.” - For older employees: “More paperwork,
but your employer will be obliged to
contribute to your pension … even if it
is too late.” - For temporary staff: “Terrible news,
you’ll now get sacked after three months
not six.”
Etc., etc. Unfortunately, the picture
is still somewhat blurred, despite being
several years in the making – and
beware anyone who tries to give any
advice if he or she is not properly
registered (e.g. me). But the least I can
do is to alert readers to the coming
changes.
Obligations
So it is that employers will be obliged to
contribute and to enrol staff in a
pension scheme and staff will be
obliged to automatically be enrolled
(although they can opt out if they
choose to make their own
arrangements).
As the proposals appear to stand at
present, it looks as if practices will have
to contribute 1% of salary rising to 4%
in 2017 and staff will have to contribute
1% of pay rising to 4% by 2017 to their
pension scheme.
So by 2017, 8% of an employee’s
wages will find its way into a pension
scheme. Clearly this must be “a good
thing”, encouraging all of us to put
money aside for our retirement, but the
sceptics amongst us will wonder
whether there is a hidden agenda from the government
(current and past) to
reduce the need for
state funding.
There are mixed
messages: “We are
increasing the State
Basic Pension” yet on
the other hand “the
State Second Pension
(formerly SERPS) will
become a flat rate
benefit instead of
being earnings-
related”. I wonder how
many saw this coming
when the name was
changed? Inicidentally,
company directors should check that they
are paying enough national insurance to fund their state pensions.
Compulsory from 2012
The new arrangements must be adopted
by every “body” which employs people,
however small, but not the self-
employed. There is also a three-month
grace period for new employees.
In this profession we don’t have a
particularly rapid staff turnover rate but
I imagine in many other sectors (e.g.
catering, construction, etc.) there will be
a lot of three-month agreements
(informal of course!) being drawn up.
Every employee earning £7,500
upwards who becomes a member has to
contribute too. The new arrangements
are compulsory from 2012 for large
firms and from 2014 for small firms
with the introduction being phased in
over a period based on PAYE
references (to be known as “staging
dates”).
The government will write to
employers around 12 months before
their staging date so that they know
when they are expected to automatically
enrol their staff. Three months before
the employer’s staging date, the
government will write again to remind
them of the new duties and the need to
register.
Most small-size employers (which
will include most veterinary businesses)
are likely to use a government-backed
scheme called the “National Employment Savings Trust” or NEST,
which promises low costs and charges.
However, other financial institutions will
get on the bandwagon and we have
already been contacted by our bank
offering to “Help” with this and telling
us that they will administer their own
scheme; I wonder how their fees
compare…?
A positive thing
The establishment of a sound all
[political] party agreed base employee
pension has to be considered a
positive and good thing both from a
national point of view and from the
13-14 million private sector employees
in the UK. It has been broadly
welcomed by the pensions industry
and the financial services sector
generally.
But the real problem of finding
the contributions has been left
unanswered and will no doubt have to
be met by increased costs to
consumers and further deceleration of
pay rises over the next few years. As
the government is painfully finding
out more generally, money has to
come from somewhere.
For these new pension
arrangements, you can’t just allocate
8% of a salary to a pension and
expect the employee to live on 8% less
nor the employer to suddenly find the
wages bill rising by 8%.
The government has also been
reported to be suggesting a future flat
rate state pension of £14,560
(Guardian newspaper, 6th November
2010). When? It hasn’t said, nor where
the money is coming from, but the
state second pension (formerly
SERPS) may well be axed.
The state provisions for the future
are likely to be designed as a minimum
level of income on the basis that all
employees will compulsorily be
providing some retirement income
from their own pension pot.
Added hassle
As well as funding the scheme itself,
there will be added administration hassle
and expertise needed. In a stable
practice with not too many employees
and low staff turnover (like mine, pray it
carries on like that), it will be a one-off
hassle and I will be genuinely pleased to
be helping my employees (and myself)
save and plan for the future.
For bigger practices, which may
have a more detached interest in their
staff, it will have much less reward.
I also worry about how we are going
to be able to best advise staff, for
example those who already have
pensions, what should they do? If they
opt out of these new arrangements, will
I be compelled to contribute to their current private one? How will that even
out with my contributions to other
employees from their gross wages?
Can I offer it and make it
compulsory? What happens if the
provider I choose fails in the future?
Can I enforce the new scheme if an
irresponsible member of staff would
rather just have a higher salary now and
not have the pension taken off his or
her wages? How did I manage to sleep
through all the pensions’ law lectures at
vet school? Please can I just go back to
just making animals better? It’s much
easier.
Joking aside, the government is
expecting a lot from employers as all
the above will be asked by staff and we
will have to bring in someone to advise
us. To help answer some of the above
queries, here are a few words from a
recently retired pensions manager of a
large manufacturing company (also
more importantly my dad, so he’s free).
“The one word of advice I gave to Gareth
when he first mentioned that he was thinking
about writing about pensions was … DON’T!
My years in occupational pensions, often now
seemingly called ‘workplace’ pensions, taught
me that there is never ONE answer …
especially if the state has any influence.
“So what can I, as a retired pensions
manager, add to Gareth’s musings? Certainly
I will not ‘advise’. Yes I agree that anything
that encourages employees to build up a
financial reserve to draw on in retirement is a
good thing. Over the past 40 years I have been
fortunate enough to work with companies
which have wanted to encourage that too with
the result that both employer and employee
were prepared to pay to fund ‘final salary’
pensions, but depressingly they were accused of
being paternalistic so were forced to abandon
compulsion back in the late 70’s, leaving many
employees without provision because they chose
not to contribute and hastening the demise of
solid pension provision.
“Now we see the tide of change that they
call ‘pensions reform’ but as they say ‘there is
no gain without pain’. DON’T DELAY. I
urge all of you who are ‘employers’ to seek the
services of a good independent financial
adviser (often ‘free’ if they benefit from
commissions) who will be able to set up your
pension arrangements; they will probably also
sit down with your employees to encourage
them to participate rather than opt out for the
wrong reasons. To those of you reading this as
an ‘employee’ or ‘sole trader’, I hope that you
have seriously thought about where your
retirement income will come from and are not
relying simply on the state to provide.
“For the letters of the law, you will do no
better than refer to the Regulator’s pension
website, www.thepensionsregulator.gov.uk
pensions-reform, where you will find other
links to useful related sites such as the actual
rules; there is also a very useful FAQ section
which may help to answer some of the
questions Gareth poses.”
