Company pensions to be scaled back to meet cost of reforms

Many companies will reduce the benefits they offer in pension schemes for employees as they seek to claw back the money they will have to spend to meet government reforms.

Companies will have to ‘auto-enrol’ all of their employees into a pension scheme from 2012. But according to research from actuaries, 41% of companies will reduce the benefits provided to existing and future company pension scheme members.

More than two thirds of the large companies surveyed by the Association of Consulting Actuaries said they fear that the scheme appears complex.

The actuaries’ report also found that three quarters of employers think that employees who have less than three months’ service should not be auto-enrolled.

Criticisms

The requirement to get all workers saving for a pension comes as fears grow about the toll an increasing ageing population will have on the state.   Many people aren’t prepared for retirement, and currently some 750,000 of employers don’t offer any pension provision.

The Nest scheme, formerly known as Personal Accounts, has been introduced to help solve the lack of savings. But it has come under fire for the high charges that the scheme will incur which include a 0.3% annual management charge as well as a temporary 2% contribution charge which would help the scheme repay government loans. But this ‘temporary’ charge could be levied on savers for 20 years, pensions minister Angela Eagle has said.

The Confederation of British Industry has warned that workers – particularly those in their 40s and 50s – will realise that putting money into Nest will leave them worse off when compared with saving into a workplace pension with significantly lower average charges.

There are also concerns that low income families could lose means tested benefits.

How will Nest work?

The plans to auto-enrol workers, (put them automatically into a pension scheme, but then give them the option to opt out) is part of a scheme to encourage low to middle earners to save more for retirement. To qualify jobholders must be aged between 22 and State Pension Age and earning more than £5,034 and not more than £33,540 a year.

The total minimum contribution to all jobholders’ retirement savings pots will have to equal 8% of earnings. Of this the employer will have to contribute a minimum of 3% while the rest will be made up of tax relief and the jobholder’s contribution. There will be a £3,600 per year limit on how much can be paid into each member’s retirement savings pot.

The ‘Nest’ scheme has been created for employers to use to meet these new requirements, but employers can choose Nest or another qualifying workplace pension scheme to meet their new duties.