The state pension is facing a long overdue rethink. We urgently need a simpler, more generous state pension that sets a foundation for people to build their workplace pension on. Joanne Segars, Chief Executive, National Association of Pension Funds, explains.

In its first year of power, the Coalition Government has shown a lot of vigour in reforming the world of pensions. The default retirement age is on its way out; faster increases in the state pension age for men and women are on the verge of becoming law; and Lord Hutton has set out ideas to reshape public sector pensions. Perhaps the biggest change for HR professionals will be the introduction of auto-enrolment due to come into effect for the largest employers in little more than a year’s time, from October 2012. You can find out when auto-enrolment will affect you by checking the Pensions Regulator’s website. Once the policy has been fully implemented by 2016, every employer will have to automatically enrol the vast majority of their employees (subject to age and earnings requirements) into a workplace pension. Employers will have to contribute three percent and employees will pay four percent, with an extra one percent added by the taxman.

And to ensure that every employer has access to a workplace pension, a new low-cost pension scheme has been set up to help employers who do not already have a pension scheme in place. This scheme has been labelled NEST, standing for National Employment Savings Trust. The Coalition Government never really questioned the basic tenets of auto-enrolment when they walked in the door at the Department of Work and Pensions, but they did take the advice of a review team to make some changes to the detail. The Government, like the National Association of Pension Funds, has always been supportive of auto-enrolment. Millions of employees will be brought into pension saving for the first time. It’s a crucial part of the battle to get the UK saving more for its retirement. Earlier this year, the Government published the Pensions Bill 2011, and once the Bill makes its way through Parliament (Royal Assent is expected sometime in the Summer), employers will: Have to auto-enrol employees earning above £7,475 into a pension. However, employers will still have to pay contributions on the band of earnings between £5,715 and £38,185.

Have the option to delay auto-enrolling their employees by up to three months, although eligible employees would be allowed to opt into the pension at any time during the three-month window. This would enable employees to start saving from day one, if they wanted to. Be able to use a new system of certification to demonstrate that their scheme meets the new auto-enrolment quality standards. This would apply to employers looking to auto-enrol into their own staff scheme, rather than NEST. The Department for Work and Pensions is working out the detail of the new system and will consult on it in the Autumn. Of course, these changes create significant challenges. And as HR professionals, many of these challenges will fall to you. Where do you start? It is essential that organisations start getting to grips with the changes as soon as possible. With auto-enrolment due to start for large employers in October 2012, many of them only have 18 months left to prepare.

Firstly, you and your employer will need to start thinking about how you will apply auto-enrolment, and into what scheme you will auto-enrol your eligible employees. Will everyone be auto-enrolled into the existing scheme at existing contribution levels? Or will you auto-enrol new staff into NEST, for example, or will you change your current scheme in order to keep costs down? No matter what decisions you take, you will also need to make sure that your Third Party Administrator is fully aware of the changes and what they need to do to prepare. If something goes wrong, it will be the employer who is found to be in breach of the law, so it is crucial that you speak to your TPA.

Finally, everyone involved in pensions from HR professionals, employers, pension schemes and the Government will have to communicate these groundbreaking reforms to employees. People need to understand the importance of saving for their older age, and the tax and contribution benefits of a pension should be clearly explained. Too many people are scared of pensions. They find them confusing and complicated, and so they simply switch off. If auto-enrolment is poorly communicated, staff will see a hit on take-home pay, fail to appreciate the nature of the investment, and simply opt-out of the pension. As an ageing society, we can’t afford to let that happen.

Joanne Segars, Chief Executive
National Association of Pension Funds
www.napf.co.uk