DC flexibility: What employers need to know www.allenovery.com 2 DC flexibility: What employers need to know DCHQ ‘Freedom and choice’ series: briefing 4 DC flexibility: what employers need to know From April 2015, workers will have much more flexibility about how they access their DC pension savings, and will be able to use that flexibility normally from age 55. The DC access changes aren’t just about providing alternatives to buying an annuity; for many workers, reaching age 55 after April 2015 will mean they have access to the single largest cash sum they have ever experienced, and that is bound to have an impact one way or another on their future plans for both work and leisure. This briefing outlines the potential implications of the changes for employers and the key issues which need to be considered. © Allen & Overy LLP 2014 3 DC flexibility: What employers need to know Changing work and retirement trends Preparing for change Traditionally, there was a fairly clear boundary at which work ended and retirement began, defined by the normal pension age for taking benefits under the pension scheme rules. This was generally aligned with the state pension age and, in the past, was supported by the default retirement age. How can employers prepare for the changes? Based on an assessment of their workforce profile and likely preferences, employers need to consider whether an increase in the number of workers postponing retirement could lead to performance management issues or implications for staff turnover. How will you deal with an upturn in requests for flexible working? Might the DC access changes lead to retention problems among higher earners, at the senior management end of the workforce, and if so how would you address that? Although scheme rules still refer to normal pension age, in practice, members may well take their benefits either earlier or later than that. State pension age is still a defined point, but one which is moving upwards – initially to 67 in 2028 and higher in later years – and which has no particular correlation with when members either retire or take their benefits from an occupational scheme. In combination with the trend towards later or partial retirement and the removal of the default retirement age, these changes mean that age, work, retirement, scheme pension and state pension are increasingly distinct concepts with no necessary bearing on each other. These are fundamental changes to the way we look at work and retirement – so what are the implications for employers? Impact of DC access for employers The two fixed points we will have from April 2015 in relation to pensions are age 55, when individuals get access to their DC pension savings, and age 75 which is the age at which workers cease to have any auto-enrolment rights. What does that mean for the length of a working life? It’s easy to imagine a couple of contrasting effects flowing from the DC access changes. First, and perhaps particularly in relation to workers with lower overall pension savings, we may see an increased trend towards later retirement in cases where workers have cashed in DC rights, spent them on lifestyle improvements, and can no longer afford to retire at the point they, or the employer, might otherwise have expected. At the other end of the spectrum, we may see workers with higher levels of DC rights drawing on those savings to fund partial retirement or flexible working arrangements. The right to request flexible working now covers a large proportion of the workforce, not just parents and carers. © Allen & Overy LLP 2014 There are logistical issues to consider, too. You will be contributing to a pension scheme on behalf of all your eligible workers who have not chosen to opt out of pension saving – and you may be contributing more than the auto-enrolment minimum level of contributions to a DC scheme. If workers choose to cash out their savings from that scheme while continuing to work, what pension provision would you make going forward, and would you use the same scheme or a different auto-enrolment qualifying vehicle? If membership of your main scheme would cease in these circumstances, does that have implications for life assurance cover? 4 DC flexibility: What employers need to know Other issues to consider Administration Workforce information There will be administration issues to consider as a result of the changes – for example, in updating systems, possibly increasing administrative capacity, and informing workers about their options. There’s also an opportunity for all employers to increase workforce recognition of the value they receive as part of their overall benefit package in the form of pension saving. Pension payroll Auto-enrolment opt-out rates are generally low, but they could be lower. It may well be that more workers are encouraged to take up the offer of pension saving as a result of the DC access changes, because they recognise that they will benefit from the cash at the end of the day. Those who do contribute, may do so more enthusiastically as a result of the reforms, so if you currently match workers’ contributions to any extent, this could also push pension payroll costs upwards. DB derisking options The reforms also bring opportunities: employers with DB schemes will be interested in exploring the increased potential for liability management and risk transfer. © Allen & Overy LLP 2014 Your communications and long-term strategy for providing information and support to workers about their pension options will have a key part to play in these areas, and will need careful consideration in conjunction with the trustees or providers of your pension arrangements. For more information about the April 2015 changes and their implications for schemes, employers and individuals, visit our online resource base, DCHQ at www.allenovery.com/dchq. OCTOBER 2014 For more information, please contact: Maria Stimpson Däna Burstow Tel +44 20 3088 3665 Tel +44 20 3088 3644 Neil Bowden Helen Powell Tel +44 20 3088 3431 Tel +44 203 088 4827 [email protected] [email protected] [email protected] [email protected] GLOBAL PRESENCE Allen & Overy is an international legal practice with approximately 5,000 people, including some 526 partners, working in 44 offices worldwide. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi Amsterdam Antwerp Athens (representative office) Bangkok Barcelona Beijing Belfast Bratislava Brussels Bucharest (associated office) Budapest Casablanca Doha Dubai Düsseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Istanbul Jakarta (associated office) London Luxembourg Madrid Mannheim Milan Moscow Munich New York Paris Perth Prague Riyadh (associated office) Rome São Paulo Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C. Yangon Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings. © Allen & Overy LLP 2014 | CS1410_CDD-40301_ADD-47695 www.allenovery.com
© Copyright 2024