Last month the department for work and pensions published the results of some research looking at employer's pension provision and how this may change in the run up to 2012. The research illustrates the challenge facing the Government as most very small employers have little knowledge or interest in providing pensions for their staff. But, it also highlights the opportunities available for advisers to help medium and large employers prepare for the introduction of automatic enrolment and compulsory employer contributions.
While the vast majority of micro employers - those employing less than five employees - don't have a pension scheme, larger employers are much more likely to have some form of existing arrangement. However, this provision is unlikely to be on offer to all staff and, even when it is, average take-up is low. For example, across all employers with between 100 and 499 employees, active pension scheme members only account for 33% of employees. The research also highlights that for 65% of large employers (1,000 employees or more) less than half their workforce are members of the pension scheme.
Pension scheme membership also varies hugely by industry sector, with finance having the highest average take-up of 73%. The lowest proportion is in the hotel industry where only 6% of all employees are members of an employer pension scheme.
All companies will need to ensure they review, and probably extend, their pension provision. Employees above age 22 who earn more than £5,0351, need to be offered a minimum employer contribution of 3% of qualifying earnings. And the introduction of automatic enrolment, and three-yearly re-enrolment, means more people will remain as members. Employers will need help in working out the best way to deal with this potential increase in pension costs and, not surprisingly, the research shows the use of external advisers is likely to increase in the run up to 2012.
The reforms also place additional compliance responsibilities on employers. This includes automatically enrolling staff within specified timescales, ensuring contributions meet at least a certain minimum level, and re-enrolling those who have opted-out, at least once every three years. Companies which experience high turnover - for example those in retail, hotel and construction sectors -may have extensive compliance issues. The research confirms all but the largest companies will be looking for external guidance about these regulatory requirements, and financial advisers are ideally placed to help employers fulfil their new obligations.
The introduction of automatic enrolment and the need for an employer contribution from 2012 will provoke a seismic shift in pension provision in the UK. For the first time, employers won't be able to choose between having a pension scheme or not. Instead, the choice will be between a bespoke pension solution designed to meet the employer requirements and fulfil their employees' needs. Or enrolling employees into the one size fits all, no bells and whistles personal accounts scheme.
Nearly all employers in the UK, whether they employ two staff or two thousand staff, will be affected by the 2012 reforms and, as this research illustrates, many are still unaware of the scale and impact of the changes being introduced. The need for financial advice is paramount so the next few years, leading up to the introduction of these changes, bring huge opportunities for financial advisers.
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