Posts Tagged ‘Pension’

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.

Removing the Default Retirement Age– 4 things to worry about

We decided that we would take a break from writing about NEST and auto enrolment and focus instead on an issue that will one day affect us all – our retirement date.

The announcement today that the Government are pushing ahead with the removal of the Default Retirement Age has caught many people on the hop. If you feel inclined the Department for Business, Innovation and Skills (BIS) have published today the results of their consultation exercise. It makes interesting reading. To save you rooting around the web site here’s the link.

Knee Jerk?

It’s only three months away. Time is running outThat’s not a long time for employers, insurers and everyone else to consider what they need to do to comply with the new rules. Considering the forthcoming rules to automatically enrol employees in a pension scheme have taken years to get to the current Pensions Bill three months is a very short crash landing.

In our experience when anything like this is rushed into implementation by the legislators it normally ends up being bad news. A little too much knee jerk reaction.

Workplace Benefits – Left in limbo?

The rush to remove the DRA has left many employers in limbo about what to do about the benefits they offer their employees.

Many offer life assurance and income protection to employees. These benefits are insured with insurance companies.

Pensioner on Bench

Typically the insurers will only offer cover up to a maximum age – 75 usually. Clearly if an employee could in theory work into their 80’s the risk of death or long term illness grows massively. We’ve have clients who have had employees working into their mid-80’s even before these changes.

If the cost of these benefits starts to soar employers may simply remove them to avoid having to carry the risk for those employees that they could not get cover for. Serious concerns were raised in the consultation that without some form of clarity the removal of the DRA could have a negative impact on employees of all ages.

The good news is that in the consultation paper the government recognised this and they’ve said:

The Government recognises that there is a risk that employers may cease to offer insured benefits as a consequence of the removal of the DRA, and will therefore introduce an exception to the principle of equal treatment on the grounds of age for group risk insured benefits provided by employers.

The question is of course when and how will insurance companies react during the period when we are all in limbo. We have been in discussion with insurers about our own clients already and its really difficult to get any clarity.

Let’s keep our fingers cross that the government walk the talk – and soon – so we can all move forward with some clarity.

ACAS Guidance

The government are looking to ACAS to help employers with the compliance aspects of the change to the DRA.  They have issued a guidance booklet that you’ll find here.

In relation to the insured benefits we considered above the guidance booklet from ACAS states:

Some employers provide group risk insured benefits (including income
protection, sickness and accident insurance, as well as private medical
insurance) for their workers. These benefits will be exempt from the principle of equal treatment on the grounds of age so that it will remain possible for employers to cease to provide or offer these benefits once a worker has reached the age of 65 or the State Pension age for men, even if he or she decides to continue working beyond that age.

The age at which group risk insured benefits can be withdrawn will increase in line with increases to State Pension Age.

Far be it for mere mortals like us to question this but as far as I am aware I have yet to see any evidence of the exemption. The clock is ticking!

Bursting at the Seams?

Our worry about ACAS is that one if its other responsibilities is to mediate in employment disputes – including those that are due to be heard at an Employment Tribunal. With the huge amount of redundancies that have taken place in the current economic climate ACAS already have their hands full.

Last year there were 236,000 tribunal claims, up 50 per cent in a year – and nearly three times the number just five years ago.  It’s clear to us, and from the experience of our clients, that the resources of ACAS – certainly in this area – are stretched. With this extra responsibility – and a very short timeline – is it a step too far? Especially as like most bodies the funding ACAS receives is bound to be under close scrutiny.

One things sure from all this is that there’s some work to be done by employers and their advisers over the coming months. If you have any comments about the removal of the DRA and the points raised in this post we’d love to hear from you. Leave a comment below.

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 – what have you got to lose?

A casual acquaintance or a rude awakening?

You know nothing ever seems to stay still in the world of pensions and benefits. As unbelievable as that may sound it’s not such a sleepy backwater anymore. The pace of change has really hotted up over the last ten years or so. We are seeing more and more case law and litigation which contests and re-defines large chunks of the status quo.

Not only is there UK legislation to think about but we also have the input from European Legislation on top.  As if that wasn’t enough the plethora of Ombudsmen (I have no idea what the plural of Ombudsman is!) that we have in financial services and pensions also have their say.  It’s for that reason that the old fashioned role of the “pension adviser” has had to change.

The Role of the Adviser

Historically for most smaller employers the adviser would “look after the pension scheme” which basically meant providing a basic level of admin support to the employer and signing up new joiners and dealing with leavers and retirements. If you were lucky they also looked after your group risk benefits and, even rarer still, your private medical care. That model gives you the employer no protection whatsoever. No one has the job of keeping the employer on the straight and narrow and making sure that you comply with all of the legislation and regulatory changes.

I’m glad to say that things are changing and there are a growing breed of advisers, like 44 Financial, who see their role as part of the team of business advisers who keep the employer on track. The old aspects of admin and basic advice and information for members are normally still in there as part of the service. It’s really that the principal role of the adviser has been redefined – and for the better.

The Daily Telegraph Case

What, you might ask, has this got to do with me? A recent article in Employee Benefits magazine highlighted the growing number of workplace disagreements. You can read the full article here. The interesting part for me was the Case Study that explained the judgement against the Daily Telegraph in the case of acworker who had been termed a “casual”. You can read the Case Study here.

Most (but by no means all!) of the benefit eligibility criteria that exist today have been amended to take out any discrimination on the grounds of age, gender or part-time employment. Your employees on fixed term contracts have also been accommodated after the UK introduced rehulations to comply with the European Directive.  Chapter and verse on the regulations is here. However, the vast majority of employers that we have worked with still exclude employees who work on a “casual” basis. Admittedly it doesn’t affect every employer but you’d be surprised when you speak to employers how many temporary employees they have from time to time. If you have employees like this are they excluded from your benefits package if they don’t come under the Fixed Term Regulations?

This initial Employment Tribunal judgement in the Telegraph case ruled that the employee was entitled to the full package of benefits. It has now taken a further judgement from the Pensions Ombudsman to rule that access to the Pension Scheme should have been granted.

I can only guess that as time goes on and employees become more aware of the benefits provided and their entitlements that this type of case will increase.

Where do we go from here?

We’ll be talking to our clients about the use of temporary or infrequent employees to gain some idea of how widespread the issue is. It’s likely that we will recommend that some clients take advice from their employment law advisers.

It’s almost definite that we’ll recommend that changes are made in the long run to the eligibility criteria for various benefits.

That’s what we’ll be doing for our clients. What is your adviser doing for you? We’re currently offering, at our expense, an initial consultation for our Your Benefits Roadmap programme to the first 20 employers who subscribe. If you want to find out more and how this could not only save you money but keep you on the straight and narrow please contact us at