The pensions steamroller all companies face

It has basically been decided that employers will need to fill the gap left by the demise of the old earnings-related state second pension. How will they do that? Well, they'll be required to put in place a funded workplace pension scheme and auto-enrol their eligible employees into it. They'll also have to contribute a minimum amount towards their employees' pensions.

What qualifies?

A Qualifying Workplace Pension Scheme (a QWPS) will eventually require a total annual contribution of 8% of a band of earnings called Qualifying Earnings if it is to pass muster. The Qualifying Earnings band lies between £5,035 and £33,540 a year right now, but that will change over time. An employer can pay as much of the 8% as they like, but they may not pay less than 3% of Qualifying Earnings.

What interests me about all this, and what I think people need to start thinking about, is that once the dust has settled and the early phasing stages are over nearly every employer in the land will see 8% of Qualifying Earnings being drawn from their business every year and put away into long-term pension savings. It's true that the employers will only actually have to pay 3%, but the money their employees will pay comes from the employers anyway. The whole lot comes out of the business even if the employer pays it to the employees first and then collects it back from them to remit to a pension scheme. Employers don't have access to a special supply of money outside of the economy that they can draw on for pension purposes; every pound put aside for the pension comes from the employers' businesses, whether paid by the employer and employee or paid just by the employer.

Plan ahead

That being the case it might be useful for employers and their employees to sit down and think carefully about what is going on here. Employers who say 'Look, this is happening years in the future, I'll worry about it when I need to', or things like that, might eventually regret doing so. The thing is that the legislative steamroller is already coming their way. Sooner or later it will be their turn to comply with the new pension rules and to pay towards their employees' pensions; there's no way out of it; no hiding place.

When the steamroller hits

I'm very interested in what will happen when the steamroller hits and employers do what they have to do. How will the present things to their employees? Maybe they'll say things like 'I've put a company pension scheme in for you and I'm paying into it because the Government's forced me too; am I a good employer or what?' It doesn't sound that positive, does it? I mean, there's not a lot of kudos in it for employers who say that sort of thing; not to my way of thinking anyway. It sounds a bit like an employer today saying to their workforce 'Look, I'm paying your National Insurance Contributions every week, am I a great employer or what?' That's got, like, 'So what?' written all over it hasn't it?

And that's the trouble I think. There seems to be little kudos available to employers who simply do what they're forced to do. But pension schemes, up to now at least, have always been about kudos if you think about it.

The employer pays it all...

I've been thinking about non-contributory pension schemes quite a lot lately. A non-contributory scheme is one where the employer pays all the contributions and employees only pay extra contributions if they want to. An employer in the future who says 'I'll pay the whole 8% that the Government requires and pay all the costs and everything so my employees don't have to pay anything at all if they don't want to!' will pick up plenty of kudos I'd say. But get this; if they do that it won't really make a lot of difference to what's really going on in their business if they've taken the time they have to adjust the way they pay their employees to allow for it. Not so much salary sacrifice, but accepting that 'pay' in future will be part cash and part pension contribution.

Any employer who takes such an approach will gain in three ways. First, as I've already said, there's kudos in it for them. Second, it will be a lot less palaver and work for them too; it will be easier to simply pay the total pension contribution rather than pay some of it to their employees first and then go to the trouble of collecting it back to remit it. Third, and probably most importantly, the overall cost to their business will be lower as they and their employees will not need to pay National Insurance contributions on money that is not paid as salary.

Like I said, it's something to think about isn't it? And one thing these protracted reforms give employers is time; what they need to do is to make the best use of it...

Steve Bee is managing pensions partner at Paradigm Pensions. Visit jargonfreepensions.co.uk where you can find a simple pensions A-Z.