A few weeks ago I entered a ‘good news’ post re the abolition of the DRA ( https://www.jelfgroup.com/blog/2011/01/dra-and-some-good-news/ ). I did leave one question mark to be further expanded on, what does this mean for employer sponsored Group Pension plans? I have not had a chance to get back to this before now (sorry!), but thought I should now seek to close this loop, at least until we know more of the detail.

As I stated in my earlier post, the proposed exemption for Group Risk (that’s Group Life, Group Income Protection, Group Critical Illness and, presumably, Group Medical) removes many of the immediate concerns for both employers and the industry regarding this legislation and the impact on employee benefit provision. This is good news. However, I have yet to see much on the pension side of things.

For employers operating a Money Purchase, also known as Defined Contribution, pension scheme (particularly a ‘contract based’ scheme, such as a Group Personal Pension or Group Stakeholder), I don’t forsee many, truly problematic, practical implications in the short-term build up to this legislation, although bound to be some as the detail becomes known. But it does raise another interesting question around pension savings.

Some of you will recall that I outlined a (not entirely) hypothetical case at our recent London seminar on this very point, and I thought it was time that I revisited this so that readers are aware of the issue.

Before I proceed further, I would stress that this is not an ‘ageist’ post. It has pretty much always been the case that where an employee is important to an employer, and importantly where the employee wishes to do so, that the employee will be retained post State Retirement Age by the employer in some capacity. This is an accepted norm (particularly for the SME sector), is generally good for both business and the UK economy, and did not really require the sledgehammer of legislation to legitimise this.

However, this is not always the case, and this is what my example case below seeks to expand on. I have changed the names and details to protect the innocent, but I am sure you will understand that the suggested case study below is likely to become a common occurrence:

Suggested Case Study

Employee A is a long standing employee of an employer with a few hundred staff. Having been at the employer for many years, Employee A now has many friends within both the management and staff of the company, and is well liked.

Over the years Employee A has been a loyal servant of the company. However, he (or she - I don’t wish to be sexist either!) is entrenched in the working practices that he first learned, and is unwilling, or resistant, to learning new skills and adapting to new business areas that are important for the organisations business development and/or survival. Importantly, Employee A is starting to make errors which are proving expensive in corrective measures and/or client relationships for the employer.

Ordinarily, the employer would take action based around capability. However, the employer has been keen to avoid this as:

a) any action against this employee may result in poor employee relations with other members of the workforce

and

b) employee A has been with them so long, they want to treat him well.

Crucially, the employer has known that the employee reaches State and Company retirement age very soon, so the problem will go away with minimum disruption all round.

Now, hear is the rub. Employee A has been in the company Group Personal Pension for some years, and benefited from an employer pension contribution (let’s assume 3% for this purpose), with a matching employee contribution. So unlike many, Employee A does have a retirement savings vehicle, but having not added additional contributions of his own, or taken fund choice guidance etc over the preceding years, the pension likely to be generated will be significantly less than Employee A needs to maintain his living standards. Given this, there is no ‘trigger’ for the employee to retire.

Now this is a swine from the employer’s perspective. They can’t retire the employee, and the employee won’t go willingly. The only option that they are left with is to start to ‘manage out’ this long standing, well respected and liked, servant of the company on the grounds of capability! Not good for employee relations, and the sort of decision that will leave a bad taste in the mouth for all concerned, and possibly damage employee relations for years to come.

Now I’m not saying for a moment that a good level of pension savings would remove this situation entirely, but it would certainly help, as the employee is more likely to go quietly if there is an adequate retirement awaiting him.

The DRA will raise many employee benefit issues, but perhaps the most important is that it really highlights that UK employers need to ensure that their employees have a good quality pension scheme. Employees also need to be aware of why they should add their own contributions, and actively review the investment decision and savings levels. To achieve this, employers will need to provide access to such guidance on a regular basis for all employees.

And for those not up to speed with Pension Reform, it’s worth pointing out that the perceived ‘minimum’ pension contribution levels outlined for Auto-enrolment compliance purposes are actual very low indeed, and are not an answer to the above issue in any tangible way.

So, DRA becomes part of the Pension Reform debate, although this could arguably be a bigger catalyst for improved schemes in the long term.

Hope this helps, and will comment more when detail becomes known.

Best regards

Steve