Archive for the ‘NEST’ Category
A couple of bits of background reading
As ever nothing stays the same. Just a short post to include a couple of links to some good material that I have been sent by the very nice people at Herbert Smith LLP and DLA Piper LLP. We thought we’d include the links and a little bit of background to save you the time. We try to scour the web for this sort of thing so our clients don’t have to!
Herbert Smith – Round up of pensions developments
Click here a good overview of everything that’s going on in the world of pensions. If your organisation participates in a final salary multi-employer pension scheme there’s a good write up of a Scottish case. It involves an insolvent employer and a £20m debt. We won’t say any more it’ll only spoil the ending!
There’s also a good article on a TUPE case where some employees ended up getting taxed on a compensation payment for loss of benefits on a TUPE transfer. Buyer beware is the motto for TUPE transactions.
DLA Piper LLP – Be Aware
Click here for the February edition of the DLA Piper Employment Law publication Be Aware.
There’s some good stuff on the removal of the Default Retirement Age and what you can and can’t do. There’s also a good round up of what’s on the horizon legislation wise. Finally, the At a Glance section is a good overview of the various pay rates, maximum awards etc.
Baby Boom or Bust – the financial tsunami
As the first wave of baby boomers turn 65, the number of people in the UK approaching retirement is growing at a pace never seen in our history. 
However, the problem is, for many of them, their bank accounts aren’t.
The crush of the economic downturn – which saw many people lose some of their life savings – has forced some people to work several more years than they originally hoped for when they were looking at their retirement plans.
Others simply haven’t saved enough of a nest egg over the decades to live comfortably in what should be the best years of their lives.
Just under half (45%) of employees in the UK don’t have a pension plan. The Office for National Statistics latest Pension Trends publication states that in 2007 about 9 million people were members of a company pension scheme and about 7 million were paying into a personal pension plan. The UK working population hovers around the 29 million mark. So that means only 55% are using a pension plan to save for their retirement.
A Financial Tsunami?
Baby boomers may be reaching their retirement in waves, but a financial tsunami could be in their wake.
New research by the Oddfellows Friendly Society and the Centre for Retirement Reform (CRR) into understanding of retirement income has highlighted a worrying knowledge gap among those approaching retirement.
The survey – which was conducted among 1,200 Oddfellows members aged between 55 and 65 – found that on average, £25,000 per year was considered enough to provide for a reasonable standard of living.
Nearly 20 per cent of those yet to retire either didn’t know or didn’t answer when asked how much they would need to save to enjoy the post-retirement lifestyle they want.
More worrying was the fact that most of those who said they did know actually underestimated the figure. The average answer was £380,000 when it’s closer to £500,000. According to the Pensions Policy Institute the average size of pension fund used to buy an annuity was £24,330. Unless you have a company pension to bridge the gap, or have accumulated 20 of these “”average “pension plans, it’s likely you’ll miss the target.
Clearly if these baby boomers want to maintain the same standard of living, it’s going to be difficult. It’s not an immediate problem, but it’s a problem that’s going to creep up on us in the future.
One of the effects of the prolonged economic slump is that many workers aren’t retiring at 65 and are now working for several years more than originally planned just to comfortably exist. With the removal of the Default Retirement Age making it more difficult for employers to justify retiring an employee some people who are currently working may never retire.
So what’s the answer? 
Is there one? In my previous post I wrote about my concern that we were sleepwalking towards a very poor old age.
The government is taking some action by forcing us to save for retirement with automatic enrolment into workplace pensions. However, you’re going to have to go some to build up £500,000 of a pot by the time you retire.
Many people have grown up over the last few decades with no real saving mentality or habit. Some are even largely excluded from financial products – sometimes voluntarily. Brian Pomeroy – who is the Chairman of the Financial Inclusion Taskforce – said recently:
“The single thing which is most likely to make someone who is really distrustful of the banks open a bank account is wanting a Sky TV contract.”
At the other end of the scale the boom in house prices over the last twenty years has lulled people into seeing the equity in their house as a means of financing their retirement. However, in words of one campaigner for pensioner rights “You can’t eat the front doorstep”.
Realistically there is no magic bullet. As a nation I believe that we have to:
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Educate our children about the need to save from an early age.
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Get finance into the school curriculum.
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Realise that the government isn’t going to support us when we retire.
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Make financial products simpler and more straightforward.
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Make our pension system easier to understand for the man in the street.
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Plan ahead. Having a financial roadmap helps us navigate life’s ups and downs.
Most of all it’s really simple – we’ve all got to save long and save hard for our future.
NEST on the back of a brown envelope
We’ve written quite a bit about NEST and auto-enrolment recently. It’s the pension monster coming over the hill for UK employers.
In this post we wanted to share with you some work that we had been doing with a prospective client of ours. After all why keep all the good stuff to ourselves! We’re spending quite a bit of our time looking at the financial impact of the new pension rules and helping employers understand the impact. To do this we really need to be talking to the HR and Finance Director as the new rules will affect both areas – but in radically different ways. In this post we are going to look at our discussions with the Finance Director of one of our prospective clients. It involves the back of an envelope calculation in true pension consultancy fashion!
EHF Manufacturing
EHF Manufacturing is a successful company in Leicester that’s involved in manufacturing – seems to be a rarity these days. The owners manage the business. We deal a lot with owners and managers. It’s a sector the market that we really enjoy working in. There’s nothing to beat giving advice to the people who actually own the business.
Where are we starting from?
EHF Manufacturing employs 116 employees. There are 16 employees in Management and Admin and 100 employees in manufacturing and sales. The total payroll shown in the accounts is £2,100,000. Crudely that gives an average salary of £17,600 give or take.
The existing pension cost is £40,000 per annum. This works out at less than 2% of payroll. It all points towards a really low take up of pension membership. Not good as far as the new rules are concerned. With average salaries of £17,600 per annum these are exactly the section of the UK workforce that the government want to force to save through workplace pension schemes. So far so good – unless you write the cheques that is.
Where do we need to get to?
We’ve been talking to the Directors about some succession planning and they are looking at an exit in the next five to seven years. It’s a profitable company with a good market and should be relatively easy to sell.
We started to work out the cost impact of enrolling everybody in some sort of pension scheme. We assumed that about 80% of employees were not covered by any pension scheme. That’s 92 employees that EHF Manufacturing is going to have pay pension contributions for.
The good news for the Finance Director is that the staging date when EHF Manufacturing will have to start paying for the 92 employees is 1 June 2014. So they have some time to work out their NEST survival strategy.
The back of the brown envelope
If none of the 92 employees opt-out of NEST (or the EHF Manufacturing Scheme) it’ll cost the company as follows:
| Time Period | Employer Contribution | Estimated Annual Cost |
| June 2014 – September 2016 | 1% | £11,040 |
| October 2016 – September 2017 | 2% | £22,080 |
| October 2017 onwards | 3% | £33,120 |
Is it Exit stage right for the Directors?
You’ll see that this makes a dent on the profit margin of the business. Will this deter investors or purchasers? What about the management and admin time spent implementing and communicating this to employees? This will all take place slap bang in the middle of the time when the Directors are looking to exit from the business.
NEST Survival Strategy
Although these calculations were all done on the back of an envelope (an HMRC one at that!) with a set of accounts the solution will take more organisation. We’ll be talking to EHF Manufacturing about:
- Their pay reviews over the next few years to build up a reserve for NEST.
- Salary Exchange as a way of reducing the impact.
- How the message needs to get out to employees.
- Whether EHF Manufacturing use NEST or their own pension scheme
We’ll be looking to prepare a NEST Survival Strategy for EHF Manufacturing. We’ve shown you our homework we’d love to see yours. What are you doing about auto enrolment and factoring in the cost and upheaval into your business plans from 2012 onwards. We’d love to hear. Leave a comment and let us know what you’re thinking.
Remember – A dwarf on a giant’s shoulders sees the further of the two.
The Small Print
Please take a few minutes to read our disclaimers here.
Related Articles
- Small firms ‘failing’ on pensions (bbc.co.uk)
- Auto-enrolment is “extortionate expense” for small firms (telegraph.co.uk)
Pension reforms may lead to lower contributions
We know that we have gone on a lot this week about automatic enrolment and the impact that this will have on employers. For those of you that haven’t been paying attention we’re talking about the automatic enrolment of workers into a workplace pension scheme. It all get underway from 2012.
Here is a link to an article that the Daily Telegraph published yesterday.
You’ll see that there is a growing concern that the new rules will simply lead to cash strapped employers reducing more generous contributions down to NEST levels. Our research bears this out. We have come across two employers only recently that were paying upwards of 10% of salary to employees that joined the pension scheme.
With a pension take up of less than 30% in both cases they are worried about the huge cost of including the 70% of non-joiners in such a generous pension scheme. Both are thinking about introducing a NEST category (3% of Qualifying Earnings) to save them from that hit.
There is, we believe, a real danger that the Law of Unintended Consequences will kick in. We’ll find that although more are saving up for retirement there’s less going into the pot in total.
What do you think?
Photo courtesy of Flickr: Tu Foto con el Presidente
Financial Times: Auto Enrolment will reduce profitability, deter investors and stall mergers
The FT published an article on Sunday by Debbie Harrison – one of their pension experts – that shows that the mainstream press are beginning to wake up to the impact that auto-enrolment and NEST will have on UK employers. It’s well worth a read.
Auto Enrolment will cost employers £5.5bn a year
We don’t think that any of the statistics and research quoted in the article is scaremongering by any means. Those close to the government within the pension industry have long been saying that NEST and auto-enrolment will cost UK employers billions. Even the CBI reckon that it’s going to cost UK employers well over £5bn per annum when you take into account the additional cost of administering this pensions monster. It’ll hit the bottom line for employers and, according to the FT, could deter investors and stall merger activity. That should make a few Finance Directors sit up and take notice we suspect.
At 44 Financial we’ve talked to our clients for some time about the impact that auto enrolment will have on them – looking at the direct financial impact as well as the indirect internal admin costs. Pleasingly, most of our clients and contacts are unlikely to cut the existing level of contributions downwards to match the least that NEST requires.
Levelling down of contributions
However, there are many employers who have in place a pension plan that is far more generous than NEST – often as a result of the closure of a final salary pension scheme. Automatically enrolling employees into these plans, when they already been offered membership have decided not to join, would have major cost implications for some employers. Our work with not-for-profit and third sector employers is a good example of this as contribution rates tend to be in excess of NEST but pension take up very low.
Some industries such as retail are very likely to end up with a two tier pension provision with NEST as the basic offering and possibly a more generous contribution level after a period of service. This kind of strategy would make sure that scarce resources are used to reward those in the organisation that are making a difference in the long run. During the period of potentially high staff turnover the employer pays the statutory minimum.
What’s your NEST survival strategy?
In summary it’s a very good article bringing together what pensions professionals, including 44 Financial, have said for some time. This year really is the year when employers must start to look at their NEST survival strategy.
If your existing adviser remains silent on NEST and auto-enrolment and how it will impact your organisation 44 Financial would be delighted to help. We are currently offering the first consultation in our Benefits Roadmap at our own cost to the first 20 employers who contact us. The Benefits Roadmap will, among other things, look at the impact of NEST and auto-enrolment.
Auto-enrolment is the biggest threat facing the most businesses in the next 12-36 months. Doing nothing is not an option.
Email us now at talk2us@44financial.co.uk – what have you got to lose?