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  • January 2015
01

Employers 'not thinking about knock-on costs of state pension changes'

Open-access content 13th January 2015

The majority of UK employers have not yet considered how to address the increase in payroll costs that will come with the new state pension in 2016, Mercer has said today.

From April next year, a new single-tier state pension will be introduced. The option to contract out of the additional state pension will also be removed, resulting in an increase in National Insurance costs for employers and members in most defined benefit schemes.

Mercer's Contracting out survey attempted to understanding what amendments are being made by employers to prepare for these changes.

Its poll of 142 employers, who between them employ nearly 1 million workers, found that 57% of those with DB plans have not considered or determined how to address the DB issue.

Over two-fifths (43%) said they had considered the implications of the state pension on DB schemes. Of this 43%, almost half said they were not proposing to amend their DB pension scheme. This was because they had recently reviewed benefits or were willing to accept the increase in costs.

For defined contribution plans, 70% of the respondents said they had not considered the impact of their pension schemes. Mercer said that, for many DC members, the introduction of the single tier pension will reduce their retirement incomes.

It warned that companies that don't consider the implications for DC members might find that large numbers of employees are unable to retire, having a impact on career progression, staff motivation and health costs.

 'The government's aim to simplify state pension provision is laudable but the transition will create DB and DC winners and losers. Companies need to be thinking through the implications sooner rather than later,' Deborah Cooper, a partner at Mercer, said.

'In the absence of any action, employers will see payroll costs increase by between 2% and 3% for employees who are still earning benefits in DB pension arrangements. Furthermore, the introduction of the single tier pension will reduce expected retirement incomes for many members in DC schemes.'

A similar survey conducted by actuaries Hymans Robertson also found that the end of contracting out could cost companies more than £10bn over the next decade.

And yesterday, Hargreaves Lansdown said less than half of pensioners would not receive the full-state pension when it is introduced because of insufficient National Insurance contributions.

This article appeared in our January 2015 issue of The Actuary.
Click here to view this issue
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Topics:
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