UK: Cutting to the chase. What adoption of Turner’s proposals could mean for you

On 30 November 2005, Lord Turner published his eagerly awaited recommendations for pension policy in the UK. This paper offers our views on the possible impact on employers and their pension schemes.

The Turner report represents a positive step in helping to address the looming pensions crisis in the UK by tackling both the adequacy of state pensions and widening private pension provision. The key recommendations of the report include:

• Linking the state pensionable age (SPA) to life expectancy which could therefore raise the SPA from age 65 to 68 by 2050.

• Linking future increases in the basic state pension in line with earnings rather than prices.

• Changing the State Second Pension to a flat amount.

• Encouraging more private savings through setting up a National Pension Savings Scheme (NPSS) for everybody in the workplace. This could be introduced by 2010. Employees would automatically be enrolled into an NPSS, unless they opted out. Contributions of 8% (3% from employers, 5% from employees) of relevant earnings (between £4,888 and £32,760) would be paid into individual accounts. A limited set of investment choices would be available.

• Reducing the cost of pension savings by lowering the need for advice via autoenrolment and use of default investment funds, collecting premiums through existing PAYE systems, and administering the funds centrally.

Our analysis is as follows:

A mandatory contribution to the NPSS could have a significant impact on employers, particularly those who have previously not sponsored a pension scheme for all staff. It is likely to:

• Cost UK Plc up to £4 billion per annum. It is conceivable that the cost of extra pension contributions for the FTSE 100 alone will be an average of £10m per annum per company. Currently, only 60% of the 2.5m UK employees in FTSE 100 companies participate in pension arrangements. For the very largest companies, the extra cost could amount to as much as £50m per annum.

• Impact pay reviews and wage inflation in general, as employers seek to absorb the cost of the contribution. To mitigate additional costs, employers should consider introducing flexible benefit reward schemes, where employees are rewarded by reference to total pay and benefits, including pensions.

• Have a profound effect on certain sectors, such as Travel and Tourism and Retail where there are large numbers of low paid employees, low current take-up of occupational pension schemes, and transient seasonal workers. These industries have less ability to recover costs through future wage reductions.

• Be especially hard on small employers who have traditionally not provided benefits to their employees. They will find meeting the additional costs disproportionately hard because the infrastructure within their businesses will not be in place to comply with the requirements.

• Fuel inflation as some companies look to pass on additional costs to their customers.

• We expect to see an early impact on company defined contribution schemes, whether they be occupational or group personal or stakeholder schemes. There may well be a levelling down of employer sponsored provision. There is evidence in Australia that several years after the introduction of a compulsory minimum contribution, this has become the market norm and little other contributions are provided via employer sponsorship.

• There is unlikely to be any immediate impact on defined benefit schemes as employer commitments will still need to be met. However, it may speed up the closing of these schemes as employers choose to offer the NPSS only.

• The gradual phasing out of the ability for company pension schemes to contract out of the State Second Pension will increase National Insurance costs and further strain employers offering these schemes.

• We believe that the NPSS will lead many employers to review their overall reward strategy, and raise the question of whether pension contributions become a differentiator or a hygiene factor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.