Small firms largely ignorant of major pension reforms
Posted on 18 Jun, 2012
Almost two out of three of the UK’s smaller businesses know little or nothing about the major changes to pension law that they will soon be obliged to implement. That’s the startling finding of recent research by the Chartered Insurance Institute (CII), the world’s leading professional organisation for insurance and financial services.
From 1 October 2012, the first tier of firms will be required to automatically enrol their staff onto pension schemes, as part of new rules to get up to 10 million people saving for their retirement.
Just under half (48%) of micro businesses, which are firms with under ten employees, admitted to giving no thought at all to the new rules about pensions, which will impact them in the next few years.
The CII’s research, published in a report entitled ‘Advice Needed!’ identified that only a minority of small firms are prepared for the reforms and that improved communication about automatic enrolment is needed from the government and the pensions industry.
David Thomson, CII director of policy and public affairs, said: “To be fully prepared for the pension reforms, businesses need to decide what pension scheme they will offer their employees, how they will initiate and administer the scheme and how they will advise employees on pension saving.”
The huge implications of pension reforms
The automatic enrolment of employees into a pension scheme is a massive change in way workers save for retirement. The principle of involuntary entry to a saving scheme is in itself a major upheaval, but it comes on top of every firm being required to offer a workplace pension scheme into which they must make a contribution.
At present, according to the CII, six out of ten small firms offer no form of workplace pension to their staff. The new rules bring not only an additional administrative overhead, but also an extra monetary cost, in the shape of pension contributions that could equate to a 3% increase in the cost of employing staff.
It could be hard for firms to estimate the impact of these changes. While employees will find themselves automatically enrolled into workplace pension schemes, they will be under no obligation to remain in them. A survey of 2,000 employees by Aviva found that more than one in three staff would opt out of any scheme they were placed into.
The time-bomb fears driving pension reform
Many are convinced of the need to change the culture of saving for retirement. The International Monetary Fund warned earlier this year that longer life expectancy could drive up the UK’s national debt from 76% of gross domestic product to around 135%.
A third of children born in 2012 are expected to live for more than 100 years, more than 50 times the current number who reaches that age. This means many will live for twenty or thirty years beyond retirement, but according to the Office of National Statistics, only 39% of men and 28% of women are saving for a pension.
Forcing employers to automatically enrol their staff into a pension scheme is one way in which the government is trying to address this issue. But as the CII research shows, educating firms in the new rules is not proving easy.
It will take a while to adapt to a culture of putting more money aside to live on in retirement. Graham Boffey, Aviva spokesman, said: “When the first companies start to automatically enrol their employees in October we can’t expect an immediate step-change in how people save.”
This is a guest post by Jasper Martens from Simply Business who offer a range of Invoice Finance solutions.
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