With the Chancellor reiterating commitment to State Pensions Reform, Mercer has warned that the proposals are a double-edged sword with winners and losers. Whilst the consultancy welcomed the clarity ahead of auto-enrolment beginning later this year, it said people needed to realise the simplification was not without major costs both to occupational pension schemes and employees.
Glyn Bradley, Associate in Mercer's Retirement Business in the UK said: "This is unarguably going to be a simpler system than we have had in the past, and much easier for most people to understand. People need to take responsibility for their own retirement provision if they can, but they need a strong foundation to build on. We welcome the fact that this reform will help people understand what they can expect from the state and give them more confidence that their own savings won’t be means-tested away."
"Unfortunately, some of the simplicity promised is likely to be illusory, whilst improvements for some have to be paid for by others and two groups in particular, employers and employees. The reform will kick away the final support the government has been giving to those employers still providing defined benefit schemes."
This is because, since 'contracting-out' of the additional state pension was introduced in 1978, employers and their employees have paid lower rates of national insurance ('NI') in return for good quality occupational schemes.
"Sweeping this away will raise the NI bills of those employers, which will make them think twice about keeping their schemes open,” said Mr Bradley. "Another massive disruption to defined benefit schemes is on the cards. As a result members' benefit security will be reduced and there will be increasing reliance on personal saving and defined contribution arrangements.”
Dr Deborah Cooper, Partner at Mercer, explained the second group paying for the costs of the proposals were ordinary employees who would expect to remain in work and pay in full NI throughout their careers.
“£140 per week is a better prospect for those who would have struggled to pay in sufficient NI,” Dr Cooper said “but most people who worked throughout their careers and paid in their taxes could have expected to build up more. Many employees might find their take-home pay falling and without necessarily getting a better state pension. They will need to think about saving more if they want to target the pensions previous generations have received."
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