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Pension changes need to be accommodated

22 January 2015

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The majority of UK employers have not considered how the 2016 pension changes will affect their business according to research.

A survey by Mercer, analyses responses from 142 employers with nearly one million employees. It aims to understand what amendments are being made by employees in the light of the 2016 changes.

In April 2016, state pensions will be replaced with a single tier pension as opposed to the five elements of the current state pension.

The option to ‘contract out’ of the pension scheme will be removed resulting in increasing national insurance costs.

Deborah Cooper, partner at Mercer, said: “The Government’s aim to simplify state pension provision is laudable but the transition will create Defined benefit (DB) and Defined contributions (DC) winners and losers. Companies need to be thinking through the implications sooner rather than later.”

The main difference between DB and DC schemes relates to how the final retirement sum is calculated. With DB schemes, the amount of money received at retirement is guaranteed whereas with DC schemes, the employee and employer make contributions to the scheme which is then invested in the stock market.

Cooper added: “In the absence of any action, employers will see payroll costs increase by between 2% and 3% for employees who are still earning benefits in DB pension arrangements. Furthermore, the introduction of the single-tier pension will reduce expected retirement incomes for many members in DC schemes.”