Current Pension Issues

Pension Savings: The Future

From 2012, employers will have to enrol all their eligible employees automatically into a workplace pension scheme and pay contributions on their behalf. It will be possible for employees to opt out of these schemes, but by requiring action to opt out, rather than to opt in, the Government is attempting to harness the current inertia that means many people do not join a pension scheme to encourage them to join and start saving for their future. This is a major change over the current arrangements where a company pension is seen as an optional employee benefit, and is part of the government's plan to encourage retirement planning for all, reducing reliance on state pension provision going forward. This is particularly important at a time when life expectancy is increasing meaning that people will live longer in retirement and therefore need to have a greater pension fund to finance this. The DWP predicts that millions of people who haven't before will start saving for a pension for the first time if forced to enrol through work.

The government's reform of pensions has two main thrusts:
The introduction of auto-enrolment and compulsory employer contributions.
The introduction of the National Employment Savings Trust (NEST).

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Implications for Employers

For employers, the implications are significant and apply to businesses of all sizes.

All employers will be required to enrol their employees into a qualifying pension scheme from 2012. If an employer doesn't already offer one, then they must either put one in place or use a new Government backed default scheme called NEST (National Employment Savings Trust). For a scheme to qualify it must meet a number of criteria, including paying a minimum level of contributions. A qualifying scheme can either be an occupational pension scheme, a Group Personal Pension scheme sponsored by an employer, or NEST.

As a rule of thumb, a scheme cannot become an auto-enrolment scheme unless it will potentially accept:
  • all employees
  • all those employed within a specific group of employees if employees are structured into different groupings

The new rules, once fully in force, will require a minimum total pension contribution of 8% of salary, of which at least 3% must come from the employer.

All employees between the age of 22 and the State Retirement Age earning over £7,475 a year must be automatically enrolled into a suitable pension scheme, unless they choose to opt out. Employees who have chosen to opt out will be required to opt out again every three years or will be automatically re-enrolled. There will be no reimbursement for contributions lost through opting out, to prevent employers incentivising employees to opt out.

The new rules will begin on 1 October 2012, initially applying to the largest companies only - with smaller employers being phased in over a five year period depending on size. The level of contributions will also be phased in and tax relief will be credited to employee contributions where appropriate.

Employers that do not provide a pension can set one up or can sign up to the National Employee Savings Trust ("NEST"). However, the details of NEST remain unclear, and a large part of the success of the proposals will boil down to how effective NEST really is, particularly for small companies.

Alternatively some employers may wish to use NEST to complement another qualifying scheme. It may be useful as a starter scheme for a period prior to employees joining the main scheme, as an additional scheme for employees who may receive a lower pension contribution to those in the main scheme, or for specific categories of employees.

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Employers: The first steps

Firstly, if you already provide a pension for your employees into which both you and they contribute, then broadly speaking in practical terms nothing much will change, although there may need to be some alterations to the scheme rules/set-up and administration depending on current arrangements. The pension on offer must be as good as or better than NEST, further details on this will be available nearer to the NEST launch date - broadly speaking you'll need to match or better charges and contribution levels.

Employer schemes must automatically enrol staff who are between age 22 and pension age, earn more that the minimum earnings threshold and are not currently in a qualifying pension scheme.

If you currently provide a pension but do not contribute, then you must get ready to start contributing. Equally, employees who are currently not contributing (or only contributing small amounts) will need to get ready to start making higher contributions or take the decision to opt out.

If you do not provide a pension, then you either need to put one in place (as good as or better than NEST) or sign up to NEST. You also need to get ready to start contributing and managing the administrative and potential advisory burden that this system will create.

Most importantly employers need to educate themselves about what is being introduced and when, and to prepare themselves for their new responsibilities: As a first step, find out what your staging date is so you know how long you have to prepare. Identify the costs of any changes both in administrative terms, and in terms of increased pension contributions for employees. Ensure that you are in a position to register your scheme with the Pension's Regulator at the appropriate point and meet the other regulatory requirements that will be introduced.

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Auto-enrolment Schemes

The timescales for auto-enrolment are likely in many cases to be very tight. Although the Government has relaxed these timescales to make auto-enrolment easier to administer, they are still challenging and making preparations and taking advice now may avoid difficulties in the future. There are currently over 40 different bandings for this.

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Implications for Employees

If you are an employee and are not currently a member of your employer's pension scheme then check with your employer on the arrangements they are making to comply with the new regulations. If they are confident that their scheme will qualify, think about joining the scheme now to build in the contributions into your budgeting. If it's an issue, build contributions up gradually to minimise the financial effects, and give you time to adjust to the salary deductions, so you can build up to the maximum contributions required of you by 2017.

If your employer does not currently offer a pension scheme ask what they are planning to put in place to meet their legal requirements.

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How to find the Best Employer Solution?

For each employer, what you will have to do very much depends on what, if any, employee pension arrangements you currently have in place.

Caledonia Asset Management Ltd offers a free health check to employers to ascertain whether their current pension arrangement(s) will qualify as a Qualifying Pension Scheme (QPS). If current arrangements do not qualify by way of options and design or there is no scheme currently in place, then we can offer advice to explain the main options for possible benefit re-design to gain qualification or to implement a compliant scheme - this will also include the inherent costs to facilitate compliance.

It may be that your pension scheme(s) already meet the QPS standard, however, you may have non-pensioned eligible employees who are not part of this i.e. they may have opted out in the past. In this situation, these eligible employees would then have to be auto-enrolled into a QPS, and we can also assist on advising of the relative merits and options available.

Pensions law and the employer burden is becoming increasingly complex, appointing Caledonia Asset Management Ltd to act for and run a QPS on your behalf, based on the most appropriate scheme for you, will give Employers the comfort of not having to be burdened by additional administration, reduce their responsibility for communicating all aspects to their employees and have complete confidence that the thorny issue of investment and technical advice will be catered for by a firm which offers sensible, commercial and technical solutions.

If you have any concerns about the impact the coming changes will have on you call us on 0131 225 4488 (or email click here) now.

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De-Risking Final Salary Defined Benefit Schemes

Are you an Employer and/or Trustee of a Final Salary Defined Benefits (DB) Pension Scheme with Assets under £25m, that you are still responsible for funding/managing? If so, then our Defined Benefits proposition could offer you a more bespoke and affordable solution.

One of the key aspects of this is analysing in full the possible de-risking solutions that can be introduced to alleviate future issues/problems. For example:

Risk transference - This strategy involves shifting all or part of the Scheme's risk to a third party either immediately or over a pre-determined period of time.

Risk mitigation - This strategy uses Liability Driven Investing (LDI), a framework for managing the plan's asset allocation, to de-risk the plan.

Although Liability Driven Investing has been around for years, it has only just begun to win acceptance. Yet some research suggests that LDI was the most effective asset allocation strategy in recent years, making it an attractive option for many Defined Benefit plan sponsors today.

Longevity swaps - Offers protection against demographic longevity risk, allowing for the reduction in pension scheme volatility.

Caledonia Asset Management Ltd offers Defined Benefit Pension Schemes with less than £25m of assets, a fresh, proactive and solution based advisory mandate, linked to a competitive fee structure.

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Flexible Pension Drawdown

The full requirements to facilitate this new form of taking pension income from an underlying pension fund has now been finalised and has thrown up a number of interesting pension planning issues.

One of the key aspects is the drawing of tax free cash, which can, if implemented in the correct manner, lead to the remaining funds not being treated as 'crystallised', which means that on death the new tax charge of 55% would not apply - tax free cash withdrawal under fixed drawdown always crystallises the remaining underlying fund and thus leads to a 55% tax charge applied on death.

This has particular relevance in cases where dependent pension planning is of paramount importance and can be extremely valuable in planning for the future.

As an example, if a member is just reaching the £20,000 Minimum Income Requirement (MIR) now, it makes sense from a planning perspective to consider selecting Flexible Drawdown immediately, even if the member doesn't intend to use it straight away, as it buys them in on the current MIR level of £20,000, which means that they have no need to worry about the MIR possibly increasing in 5 years time when it is due to be reviewed. In addition of course, it also means the 3 year review pre 75 and annual reviews post 75 are not required either.

If this is an area of interest to you contact us on 0131/225 4488 or email now.

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Reduced Individual Pension Contribution Limits

From 6th April 2011 the government has significantly reduced the Annual Allowance limit for pension contributions - this is the amount you can save towards your pension annually and receive income tax advantages.

Tax relief on personal contributions will be available at the individual's marginal rate for contributions up to the available Annual Allowance, including carry forward of unused annual allowance from previous years, or UK relevant earnings if lower. The one exception is where an individual uses the new flexible income withdrawal arrangements. Where flexible income applies any further contributions paid to a registered pension scheme will lead to an Annual Allowance tax charge on the full contribution value.

No tax relief will be granted on contributions paid to registered pension schemes after age 75.

The new regulations present some challenges, particularly for higher earners, and those who have made little or no provision for pensions when in their early careers but were planning to make larger contributions in later years.

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New rules for Occupational Pension Schemes

For Money Purchase Pension Schemes, including Small Self Administered Schemes, (SSAS's), the maximum allowance levels of £50,000 for annual contributions include both employee and employer contributions, and both regular and/or occasional contributions. For the majority of those saving for pensions the new limits will have little impact, and the Government view of the limit is that it will be similar to the rules applying to, for example, ISA savings, where there are clear limits on amounts that can be invested annually to qualify for tax incentives. The new limits may however provide a dis-incentive to invest in pensions above this limit.

In determining the new limits for members of Final Salary Pension Schemes, the government will apply a calculation to work out the relationship between each £1 increase in salary and the potential benefits, as for a Final Salary Pension Scheme it is not possible to give an ongoing "fund value" only a guaranteed income and tax free cash amount in retirement.

Up to 2010/11 a factor of £10 per £1 per annum increase in the benefits from a pension scheme is to be used while from 2011/12 onwards this will be £16 per £1 per annum increase in the benefits.

As an example: if in a year your entitlement to a pension from your company pension final salary scheme has increased by £1,000 p.a. then this will be deemed as a years contribution allowance of £10,000 up to 2010/11 and £16,000 from 2011/12.

If your main pension payments do not reach this annual contribution limit you are still free to make additional contributions, up to the Annual Allowance threshold, to any other type of pension scheme.

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Disguised employer payments

With the reductions in the Annual Allowance and Lifetime Allowance the Government has been concerned that other means will be used to avoid or defer Income Tax and National Insurance contributions (NIC) liabilities. It has therefore announced measures that will make schemes and arrangements aiming to achieve such aims unattractive.

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Disclaimer:

The legislative changes described on this website are contained within Acts passed by Parliament. An Act often contains only an outline of the new laws with full details provided in secondary legislation such as Statutory Instruments.

The information supplied is based on Caledonia Asset Management Ltd's current understanding of the legislative position to date and these details may change.