Employer contributions to pensions are set to become mandatory in 2012. How does this affect retailers, asks Joanna Perry
An ageing population is benefiting retailers by providing a pool of mature and experienced staff. And some retailers have become masters at milking the grey pound. But the changing demographic has also created a retirement funding crisis that the Government is hoping to avert with legislation brought in last year.
Until now, the major problem pensions have caused retailers has been the capital injections which those companies that run defined benefit schemes have needed to make to reduce funding deficits. But the issue of pension funding is going to become a matter for all retailers as changes to the law usher in a new era for how retirement is funded.
The Pension Act 2008 has set out that from 2012 employers will have to automatically enrol employees between the ages of 22 and the state pension age into a qualifying pension scheme and make contributions to it. Staff will then have to actively opt out of schemes if they don’t want to participate.
John Lewis is one of a few companies to already offer pension entitlements to all staff that go beyond what the Government is proposing. John Lewis Partnership head of pensions Dinesh Visavadia explains: “John Lewis and Waitrose partners join the [non-contributory final salary pension] scheme after three years’ service. During this qualifying period they are eligible to join a defined contribution section where the partnership pays matching contributions up to 6% of pensionable pay.”
Even retailers such as M&S, which offers what a spokeswoman describes as one of the best schemes of its kind in the UK, will have to make changes.
At present, its staff only become eligible to join its pension scheme once they have been employed for a year.
Tesco already offers a staff pension scheme that it says is a strong contributor to its ability to attract and retain good people. All staff are instantly enrolled, so must actively choose to opt out.
For retailers that have not so far automatically enrolled employees, they are likely to find the budget that needs to be allocated to pension contributions jumps once the new rules become active.
Steve Charlton, a pensions expert in consulting group Mercer’s retirement business, says retailers need to start thinking now about how they will absorb the costs involved.
He suspects few employees will opt out in the first year, explaining: “For the first year the amount of pension contribution employees and employers will pay will be a minimum 1% of salary.” Charlton believes employees will defer their decision for the first year when the sums involved are so small.
He adds that in the second year staff contributions rise to 3% – and employer contributions 2% – and then 5% and 3% respectively in year three. So staff will have been eased into paying into a pension and retailers will find their wage bill rising by up to 3% as a result.
However, he adds that new employees joining a retailer and being asked to pay 5% of their salary into a pension from day one, from 2014 onwards, may find it a step too far and participation in schemes could fall off slightly.
Charlton says the details of what companies will need to do to comply with the legislation have still to be decided, and further guidance is due by the end of October, at which point retailers will need to begin working this extra expense into business plans.
The percentage points these changes could add to retailers’ wage bills are material. “Now is the right time for retailers to be talking about how they might finance it,” says Charlton, pointing out that as well as employer contributions, there will be costs attached to compliance with the legislation relating to payroll administration and HR.
M&S provides those about to become eligible to join its pension scheme with access to a website with a pension modeller, other tools and scheme literature. All this costs money.
However, there are methods that retailers can use to minimise the burden. For those that don’t have a pension scheme at present, or don’t want to extend it to all staff members, an alternative scheme is being created by an independent body (see panel). Retailers will be able to meet their legal requirements by automatically enrolling staff in this scheme.
And retailers can minimise the burden of their own pension schemes through tax-efficient measures. For instance, salary sacrifice schemes allow staff to take a pay cut in return for their employer making the entire pension contribution. This can save 22% of the cost of pension contributions, although staff who only earn the minimum wage would not be eligible.
As Tesco shows, there can be benefits to making pension provisions. A spokesman points out that Tesco’s staff churn rate is far below the 35% a year average for retailers, and he links this to the loyalty created from the defined benefit scheme Tesco offers. Visavadia agrees with Tesco’s findings. “Our staff turnover is low – about half the average for the retail sector. We believe that reflects our benefits package,” he says.
Tesco has staff members ranging in age from 16 to 74 years old contributing to its pension scheme. Although retailers’ pension schemes have traditionally seen stronger take-up from management, employees on the shopfloor can receive good benefits too.
Charlton points out that lower-paid staff benefit from better replacement ratios – that is the percentage of their earned income that they continue receiving as annuity payments once they retire. “It is quite simple for lower paid employees to get a good payback, so they can retire on an income close to what they had pre-retirement.”
He adds that, with most pensions offered by retailers being defined contribution schemes, where there is no guarantee on the income they will generate, it is much harder for those earning £30,000 or more to achieve such a good replacement ratio.
Retailers will not be allowed to encourage staff to opt out of a pension scheme from 2012 when automatic enrolment comes into force. But the lowest paid and part-time staff will need to be educated on whether remaining opted in is beneficial to them.
Charlton explains that staff could find they would be better off without a pension as this would leave them eligible for means-tested benefits when they retire. He says that retailers must carefully consider whether they might make staff worse off in the longer term by offering pension benefits.
A spokesman for Tesco, the UK’s largest private sector employer, said that it encourages staff to think about their retirement plans. He said people spend longer planning a two-week holiday than they do their pension.
In the next three years it will be vital retailers don’t also take such a head-in-the-sand approach, as the Government intends to push more of the burden for retirement planning onto them.
Personal accounts scheme an alternative for retail
Retailers will be able to enrol their staff in the personal accounts scheme being set up by the Personal Accounts Delivery Authority (PADA) in order to help meet their requirements from 2012.
Designed as an alternative or to complement their own company pension, the personal account scheme will be specifically targeted at low to moderate earners who don’t have access to a workplace pension at present. PADA says that employees in the retail sector – who are often part time, seasonal, lower paid and move jobs frequently – are very much a part of this target market.
The scheme will be run by a not-for-profit trustee corporation.
The personal accounts scheme could be
- the sole scheme for employers with no current provision
- an entry scheme for some employers, for example, those with high staff turnover and who only make their pension scheme available to employees after a set period of time
- a foundation scheme for workers such as those in specific grades or roles
PADA personal accounts distribution manager Richard Bartlett says the scheme is being designed to minimise employers’ administrative burden and be easy for members and employers to use.
For more information on the scheme see www.padeliveryauthority.co.uk