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Yet a quarter of companies have not addressed this and half are unsure what changes they will make
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76% of employers acknowledge employees are likely to be worse off, but less than one in 5 have started informing them
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The costs of contracting out will speed up the demise of the UK Defined Benefit market
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Hymans Robertson says companies must take action now
New research from Hymans Robertson reveals that companies are not taking the end of contracting out*, a change that could be as significant as auto enrolment, seriously enough. A quarter (26%) of UK companies with defined benefit (DB) pension schemes have not addressed the end of contracting out and half are unsure about what to do, so could be sleepwalking their way into trouble.
With the introduction of the Single Tier State Pension in April 2016 comes the end of contracting out. The majority of UK companies with defined benefit (DB) pension schemes will face an increase in National Insurance (NI) Contributions which must be paid for. For an employee earning £35,000 this will mean additional costs of over £1,000 each year for the employer and £400 for the employee. Costs for UK plc in aggregate are likely to exceed £1bn each year, or more than £10bn over the next decade.
Hymans Robertson’s survey of pensions, HR and finance professionals reveals a gap between perception and reality for these key decision makers, who think they are well-prepared for this but actually are unsure about the changes they will make:
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50% are unsure which changes they are likely to make to their scheme
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29% say senior management don’t know about the resulting costs
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20% do not know what impact the change will have on employees
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19% say things aren’t progressing quickly enough
The survey suggests that the severity of the resulting costs is likely to hasten the decline of final salary pensions, with 10% of respondents considering closing their schemes to future accrual. Across the UK, this could result in the closure of around 400 schemes. However, given 50% of employers are unsure about what changes they will make the actual number of scheme closures could be higher. A further 8% say they will reduce the benefits employees receive, potentially stoking dissatisfaction among workers.
Sue Waites, Partner at Hymans Robertson, said:
“This change could be as significant as auto enrolment, yet decision-makers have not really thought through the impact of the changes and who will be affected. Senior management could be in for a nasty surprise when they learn the true costs they have to bear.
“While some companies feel they are on top of the end of contracting out, the evidence suggests that many do not fully appreciate the impact it will have on their business. The facts are simple: if they do nothing, national insurance contributions will go up. Someone must plug this gap, whether it’s the employer or the employee.
“This change will accelerate the decline of many DB schemes, ultimately sounding the death knell for some. There are around 4,000 schemes still open to accrual. Schemes that choose to close to future accrual will have to justify this decision and show it is an appropriate trigger for such an action.
“There are a range of options for dealing with the end of contracting out. As well as this research, we’ve put together a 5 step action plan to help companies make the right decisions.
“In too many cases, insufficient time and attention has been devoted to this issue. We urge employers to take immediate action so that they can make the decision that is best for their members. This is not a game of dice where you roll and hope: the best course of action must be well considered if it is to stand up under the scrutiny of the regulator, the taxman and members.”
Pension decision-makers said the top five challenges facing their business due to the end of contracting out were:
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The additional cost to the company per employee
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Employees not understanding the changes
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Dealing with the administrative burden of the end of contracting out
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Employee dissatisfaction with benefits
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Employees leaving as a result of the drop in take home pay
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