James Patten, head of Pension Benefit Design at Aon Hewitt, said:
"The newly announced regulations enable employers to amend their schemes to address the additional costs they will face when contracting-out ends in April 2016. These override the requirements in scheme rules and potentially bypass the trustees. In practice, we expect most employers to want to work with the trustees and many will look to make changes to benefits via the scheme rules and with trustee agreement. While therefore we expect few employers to use the new regulations in practice, we are hoping that they act as a catalyst for employers to focus on this issue.
“Employers could be forgiven for thinking a year gives them plenty of time to amend their pension schemes to address cost rises of around 2.5% p.a. of their DB payroll when contracting-out ends in April 2016. However, even for those employers looking simply to increase member contribution rates to offset the cost, their employees are likely to expect plenty of notice of changes. Bear in mind that these are changes that will have a significant impact on take-home pay and may more than offset employees’ next pay rise. This, in practice, could mean the need to communicate the proposals by late summer 2015.”
In summer 2014, Aon Hewitt carried out a survey of 151 private sector organisations continuing to offer contracted-out defined benefit (DB) provision to some employees and asked them how they plan to handle the ending of contracting-out.
James Patten said:
"When we checked on schemes’ level of preparedness last summer, the indications were that around 30% of employers with ongoing DB provision may make more significant changes to pension arrangements than simply offsetting the additional costs. This will often mean complete closure to DB accrual. The depression in bond yields seen over the last six months has significantly increased the cost of ongoing DB pension provision and we therefore expect more employers to take a step back and consider making significant changes to pension provision. These changes will often take 12 months to implement and so the clock is certainly ticking.
“Employers are sure to want to limit the amount of management time and cost spent dealing with this, in order that they can focus on the high-level strategy and on managing the key risks involved in the process. In response to this, Aon Hewitt has developed an off-the-shelf employee communication package which requires minimal tailoring to individual schemes and will help employers make decisions and communicate any changes efficiently.”
|
