Pensions timebomb is ticking for firms

From October 2012 certain employers will have to start making pension contributions for eligible workers.

Miles Templeman, director-general of the Institute of Directors, said there would have to be a “very substantial communication exercise” because many employers are unaware of the reforms and are “unaware of the new duties they will have to perform, as well as the potential cost.”

Employers will have to decide whether they want to use a scheme of their own or a new system called the National Employment Savings Trust (NEST) which the government has created at arm’s length. NEST is due to be officially launched in the spring and savvy employers will be able to beat the 2012 rush by signing up to it this year.

The driving force behind changes in the pensions environment is the ageing population.

Professor Shaun Tyson, Emeritus Professor of human resource management at Cranfield School of Management, said the reforms would be good in the long term for business because people will have more to spend.

He said: “The automatic enrolment in pension schemes will produce a more level playing field in employment costs, since all companies, big or small will have to provide at least a basic scheme for their staff.

“However, with an ageing population, pensions are a priority for individuals and companies, so that a substantial part of the population can live decently and will have the money to be able to buy the goods and services companies wish to sell.”

NEST is designed to be low cost, open to any employer, online, easy to understand and run in its members’ interests.

The NEST scheme offers the services of a relationship manager who could provide support to help understand employer duties.

Administrative help could also be made available to resolve early HR or payroll issues. Employers could also phase in a pension scheme by enrolling workers in stages, again to avoid having to do so all in one go with the consequent impacts on business continuity.

As for the costs, the Federation of Small Businesses (FSB) says all firms – including the very smallest – face an impact on their bottom line. The FSB reckons the average small firm – those with four employees earning an average salary of £25,000 – will pay at least an extra £2,550 per year in administration and pension costs.

From 2017, all firms and their staff will have to be fully enrolled into a pension scheme and business owners will have to pay a minimum of three per cent of an employee’s salary into a pension.

Miles Templeman of the IoD added that he feared a risk of increasing costs. He said: “The IoD also has some concerns regarding the ‘ratchet effect’ of auto-enrolment and the risk that the three per cent employer contribution will be increased over time by a future government. If this does happen there will almost certainly be a trade-off with employers offering lower salary increases if their labour cost bill is increasing elsewhere.”

But Charles Cotton, of the Chartered Institute of Personnel and Development, said pension and retirement reforms could be used positively by companies. He said: “The end of the default retirement age and the 2012 pension reforms provide an excellent opportunity for employers to review their existing approach to pensions and how it supports the needs of the organisation and employees.

“For some employers, pensions can be an important way of managing talent into and out of the organisation, while for other employers, pensions are less of an issue as they are happy for employees to carry on at work for as long as they need and so will just do the minimum required. It is important for HR to understand the needs of their employees and the business and then come up with an appropriate stance.”