From 2012, any worker without an occupational pension will be automatically enrolled into a new savings scheme, and their employer will be forced to contribute. Good or bad news for British employees and businesses?

The market meltdown, the credit crunch, rising operating costs and the prospect of job cuts mean business leaders have had little time to think about the pensions crisis. But that doesn't, unfortunately, mean it's gone away.

"It may have been overshadowed by current economic issues, but the pension crisis is still very much with us," says David Hix, associate director at Jelf Corporate Consultancy, a specialist in insurance, healthcare and financial services. "From a defined benefit perspective, falling equity prices have increased deficits, while rising inflation has increased the cost of providing deferred and pensioner members' benefits. The state of these schemes will become clear when the next valuations take place, and they are unlikely to make good reading for employers who are responsible for making up shortfalls."

For defined contribution schemes, the fluctuating markets could present an opportunity to buy at a low price in anticipation of an economic upturn. But take-up rates of these kind of pensions are low compared with final-salary alternatives. "There's a perception for many that they are almost not worth joining, even where there are generous employer contributions. In many organisations, less than 50 per cent of eligible employees join," adds Hix.

Despite all the warnings of poverty in old age, large numbers of British people still have no pension cover. Around a million of the UK's firms employ four or fewer staff and are therefore under no legal obligation to offer even the most basic stakeholder pension. According to Department of Work and Pensions figures, 80 per cent of these firms currently offer no workplace pension scheme at all. It's a worrying picture.

To try to plug the savings gap, the government announced pensions reforms in 2006. From 2012, employers will have to pay into either a pension scheme or a new "personal accounts" savings scheme for employees. Under the latter, employers contribute three per cent, employees a minimum of four per cent and the government one per cent (in tax relief). For those employers without existing pension arrangements the decision, therefore, will be whether to opt for personal accounts or set up an alternative pension scheme that would exempt them and their employees from the new legislation. (The exact format for the "exemption test" for pensions schemes has yet to be decided.)
Non-exempt employees will be enrolled into the personal account scheme automatically-unless they elect to opt out.

While most pensions experts agree that some form of compulsion is necessary to encourage more workers to save for the future, the jury is still out on personal accounts. Keith Barton, chairman of the Association of Consulting Actuaries (ACA), says: "The scheme has yet to be finalised, but it has already created a lot of confusion, and worries about high opt-out rates. Older and less well-off workers, for example, will worry about the effect on their means-tested state benefits and may feel that a personal account will be wasted, while staff who have never paid into a scheme will find it a burden."  

Similar challenges lie in store for some employers, says Jonathan Reynolds, director of financial services at Tenon Financial Services. "Those with temporary and part-time staff could face a huge administrative headache, and that's without the burden of the three per cent employer contributions."

The scheme will be implemented over three years, with employer contributions not reaching three per cent until 2014, leaving smaller businesses to bite the bullet and tackle the red tape and the costs. Even so, it seems likely that it will affect employers' views on future pay increases.

The ACA has highlighted another potential pitfall: its 2008 smaller firms pension survey revealed that as many as a third of employers would reduce their pension scheme benefits or close their own schemes in favour of personal accounts.

What of the potential for high opt-out rates? The key to solving this problem seems to be addressing its underlying cause. The majority of employers remain committed to pension schemes, but many feel their employees do not have a clear understanding of them, and are deterred from joining.

Here, personal accounts might help. NAPF senior policy adviser Michelle Lewis is confident that when the new scheme does arrive, businesses will get a helping hand from the government in the way it is communicated to the workforce.

She says: "In many businesses, staff look to their employer for help with understanding their pension. As a government-led scheme, we expect personal accounts to be accompanied by the provision of very good information and educational resources to all employers.
"Personal accounts are seen as a way of boosting workplace pension schemes, in particular, among those businesses currently not offering any pension scheme provision at all."

Speak and ye shall find

What should employers be doing to encourage more people to contribute to a company pension scheme? Legally, they are prevented from offering financial advice, but David Hix of Jelf Corporate Consultancy insists that there is plenty they can do to help.

He says: "Face-to-face workplace education and advice has proven to optimise employee understanding of pensions, resulting in increased take-up, increased appreciation and even increased employee contribution levels. Group seminars, where employees can ask generic questions, held in conjunction with one-to-one meetings to consider the individual requirements of an employee, have proven to be the most effective."

Other things that can be helpful are clear, bespoke literature, online modelling and amalgamation tools and helpline support from IFAs (independent financial advisers) to deal with member queries.
Using a range of media can be effective, with intranets, hard copy literature and even podcasts and text messaging all considered useful tools to encourage take up. Partnering with a good quality adviser with a track record for supporting businesses in terms of education and advice can help.

There are ways of maximising the value of a pension as an employee benefit. But, again, these need to be communicated well. Salary sacrifice schemes, for example, allow employers to pay pension contributions on behalf of their employees in return for a reduction in their salary, saving on tax for the employee and on National Insurance contributions for the employee and the employer. This effectively allows employees paying basic-rate tax to boost their pension payments by up to 31 per cent at no extra cost.

Jonathan Reynolds of Tenon Financial Services argues that the financial gains may not be that obvious for some employees, and businesses need to provide a clear explanation of the scheme.

He says: "For some people, the concept of sacrificing anything from their pay goes against the grain, and a surprising number of employees have no idea how much they pay in NI contributions, and therefore won't appreciate any savings they could make with salary sacrifice."