THE last few years have not been kind for members of private-sector pension schemes. Over the past few weeks, however, things have become even worse.
The changes to tax relief on pension contributions for those earning more than £150,000, announced in the Budget last month, appear to directly impact only a small number of individuals. So why is it so important? Firstly, many of the decision-maker
s in organisations will be affected by the changes. If it is no longer tax-efficient for them to belong to a pension scheme, why continue to provide good-quality pensions for their employees?
Secondly, what will the government do next to increase tax on pensions? An obvious target would be the lump sums paid on retirement – currently tax free. Legislation refers to them as pension commencement lump sums and it is surely no coincidence that the words "tax free" are entirely absent. Unless it is made crystal clear to the government how important it is that we incentivise pension saving, and in so doing reduce the burden on the state when we retire, we are in danger of going from one of the best private sector systems in the world to the worst in a single generation.
Similarly, employees generally demonstrate complete apathy to anything pension related. Apathy has resulted in most new private sector employees joining defined contribution (DC) pension arrangements, where the employer's responsibility for financing the pension begins and ends with the money paid over each month. Employees take the risks and rewards of any good or bad investment performance.
Until now, the trend for DC (also known as money purchase) schemes has been higher contribution levels from employers and employees. But this trend is less to do with a recognition that contributions are currently insufficient to provide a decent standard of living in retirement and more to do with the increasing proportion of DC schemes that are replacements for final salary schemes.
However, pensions consultant Aon has just become the first high profile organisation to cut contributions to its DC scheme. Apart from controlling cost in a difficult financial climate, one of the key reasons given was "increasing member engagement" or, putting my cynical hat on, the apathy of members.
If we let employers take 6 per cent out of our defined contribution pot, does that make a meaningful difference to our income in retirement? Yes. For a member joining at age 25 and working to age 65 a contribution reduction of 6 per cent is likely to be equivalent to a pension of 25 per cent of salary or £7,500 a year for someone earning £30,000 a year.
The view is that it must be less punishing to reduce contributions than impose a 6 per cent salary cut? But this is counterintuitive as the latter is much less punishing in the long term, because when the economy picks up again competitive forces will bring salaries back to previous levels. The same is unlikely to happen to pension contributions.
So, don't just sit there and wait for it to happen. If your employer proposes any changes then start asking questions about your annual retirement projections, and make it clear that attacks on pension savings are unacceptable.
• Fraser Smart is regional director of employee benefits consultancy Buck Consultants www.buckconsultants.co.uk.
