Rosalind Connor in Adiona magazine on the HR challenges of the pension freedoms
Pension ‘freedom & choice’ … yet another challenge for HR strategy
A pension strategy for employees is a very simple concept. The employer puts some money aside, gets some tax breaks and, when an employee comes to retire, there is a pot of money to pay for his or her old age. However, anyone who has dealt with workplace pensions knows that they are horrifically complex, with extraordinary levels of regulation and arcane rules and structures, with regular sudden shocks from government and regulators.
The biggest shock that the industry is presently coping with was George Osborne’s unheralded announcement of “freedom and choice” for pensions 2014. This, he said, was the most radical change to pension taxation in nearly a century and means that no one would ever have to buy an annuity again. Inevitably, the detail, which came into operation from April 2015, has been more complex and nuanced than the headlines from the previous year.
The change is causing management to re-examine their pension policies in two significant ways. The first relates to the the risks and liabilities relating to individual financial decisions and the second to the more strategic issue of the management of the workforce numbers.
The changes heralded in March 2014 were that individuals (in certain pension schemes) could choose either to buy a pension, or alternatively to take the money directly out of the pension fund in sums from time to time, including the option to take it all at once. Individuals had most of these rights already before the changes, but the radical development is the removal of the safeguards requiring an individual who starts to take money out of their pension fund leaves enough there to pay for their future needs. This is where the risk lies for the individual: A pension fund tends to be the largest asset (other than sometimes their home) for most individuals and as people routinely underestimate their life expectancy there is a grave temptation to over-spend in the early years.
When people are given the freedom to make their own decision, inevitably some people will make the wrong one, as is the case in general for live in a generally free society. However, the effect of the wrong choice here is quite dramatic and might result in an individual losing all their income in old age with no means of earning to replace the amounts over-spent. Where a risk lies for the individual, there is also a potential risk for the employer: if a situation becomes very bad, the former employee could well be tempted to look for someone to blame, and possibly to sue.
Because pensions are usually provided through the employer, even if operated by a third party, it is the employer who tends to receive requests for information and advice. Although the Government has ensured that all those retiring get “guidance” under an arrangement known as PensionWise, consisting of a short telephone interview and/or the use of web tools, to help them understand the options at retirement, this is not enough for many individuals. The changes appear to have led to an increase in the enquiries to pension providers and employers from those retiring and uncertain what they should do.
The questions being asked are important and sensible, but of course are ones that the manager who is presented with them is in no position to answer. In fact, assuming that he or she is not regulated by the Financial Conduct Authority for this type of advice (a reasonable assumption), the manager may well commit a criminal offence by giving assistance. The courts have been littered with examples of helpful managers advising outside their expertise and, at the very least, being sued by individuals who, having taken that advice, came to regret it.
As a result, businesses have been moving to ensure that all managers, not just in the HR and pensions teams of a business, understand that this is something on which they cannot advise individual employees. Unhelpful though it may seem, the individual must be referred to PensionWise or a financial adviser, rather than given any type of a steer from anyone representing their employer.
The temptation of giving advice is not the only problem with the “freedom and choice” changes. Pensions are intrinsically linked to workforce management. In the 1960s and 70s, pensions were used as a retention tool, as leaving employees would lose their whole pension pot. In the days of defined benefit surpluses into the 1980s and even 1990s, pensions were used as a redundancy tool to “pension off” more senior employees with generous early retirement pensions from aged 50 or so. Recently, good pensions have been used to ensure that older employees can choose to leave work at an appropriate age, now that compulsory retirement ages no longer apply.
The effect of the new freedoms is that it encourages people to take money out of their pension fund, either to pay for one-off expenses (a common one being a wedding of a relative) or to supplement their income. Such employees will want to keep working, either full or part-time, with a view to retiring later on the rest of their pension. Of course, this might lead to problems if an individual has over-spent and may then be unwilling to retire at the planned later date.
So, the use of the freedoms encourages flexible and later working. This may be something that a business wishes to encourage or alternatively may not fit well with the business model for incentivising employees. The extent to which an employer wants to encourage (or, in cases where it has the power, allow) the use of the freedoms in the employees’ pension arrangement must be tied to an understanding of the effect of late retirement and flexible working on its business. The use, or otherwise, of the freedoms is a powerful tool for a business in managing its older employees.
Despite the fact that these changes, relating to the concepts of pensions and tax, would not usually be expected to get the blood pumping, they have had a sweeping effect on the way many employees view their pensions. Businesses are becoming increasingly be alive to the issues that these cause to avoid the risks, and make use of the tools it provides, to manage their workforces effectively.
Read the full article on page 40 of the May issue of Adiona magazine here.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.