Aon Hewitt is giving early warning that although the ending of contracting-out may not be until April 2016, the consequences for the pensions landscape over the next three years should not be under-estimated.
Aon Hewitt has recently surveyed organisations on their preparations for the ending of contracting-out and on the actions they propose taking to handle it. The survey of 91 organisations, predominantly in the private sector and with defined benefit (DB) schemes where members are accruing benefits, showed that of the third who had considered how they might respond to the ending of contracting-out, over half are considering closing their DB scheme to future accrual, among other options such as increasing member contribution rates.
James Patten, head of Benefit Design at Aon Hewitt, said:
"The ending of contracting-out is not just an administrative change - there will also be a considerable financial impact. As a consequence of the change, around 2.5% of a DB scheme's payroll will typically be added to an employer's National Insurance bill. Most employers will be able to balance out this cost via a reduction in the rate of future accrual or by pushing up member contribution rates. However, our survey demonstrates that while many remain undecided, of those employers that have reached a view on the matter, more than half expect to make more substantial changes than this."
James Patten added:
"Furthermore, off the back of other pressures like large deficits and high costs of accrual, our survey demonstrates that of those organisations that have considered the matter, over half of them are considering DB closure as an option. We expect many of these closures will occur ahead of April 2016 as finance directors are faced with difficult results from 2013 and, potentially, 2014 valuations."
"This change will cause employers to review and possibly refresh their defined contribution (DC) plans .This will be driven by the need to ensure it remains fit for purpose for a new population of members and is viewed as an attractive part of the reward package going forwards. We would hope that the government's proposed defined ambition reforms are implemented in good time to influence employers' approaches to dealing with the end of contracting-out, and to improve the outcomes for members."
Two-thirds of organisations within Aon Hewitt's survey had yet to consider how they might deal with the ending of contracting-out.
James Patten said:
"Employers should bear in mind that a typical pension review can take around 12 months to implement – and the ending of contracting-out is likely to require even more forward planning, particularly when it comes to member communications. For example, even if an employer simply intends to increase member contributions by 2.5% of pay from April 2016 in order to offset the additional employer National Insurance cost, members will want to be made aware of this proposal well in advance so they can plan for the reduction in take-home pay. This will be particularly important given that the member's own National Insurance will also typically rise by a further 1% of pay."
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