Over two-fifths of larger companies in the UK are looking at ways of reducing the cost of their company pension schemes, in a move which could adversely affect pension provision and pension income for employees.

The news reflects a general trend towards reduced commitment to company pension schemes throughout the private sector, and underlines the need for employees to seek quality pension advice on their retirement planning and projected pension income.

The Association of Consulting Actuaries has interviewed top executives at over 200 employers with company pension schemes, and found that 41% of them believe they are ‘highly likely’ to cut the cost of their company pension scheme, after the launch of the National Employment Savings Trust (NEST) from 2012.

NEST is the government-backed initiative to make company pension schemes widely available through all companies, and under current proposals will be gradually introduced on a phased basis from 2012-2017.

While there are suggestions that the scope of the NEST scheme may yet be modified ahead of the 2012 launch date, several elements in the plan, as it stands at the moment, are a source of concern for employers.

All employees are to be ‘auto-enrolled’ into the company pension schemes that must be put in place to meet the requirements of the NEST. Only after auto-enrolment can those who do not wish to contribute to the company pension scheme leave it, by actively ‘opting out ‘ of NEST. This strategy is designed to combat the tendency of individual employees towards ‘pensions inertia’ by forcing them to opt out, rather than opt in, to their company pension scheme.

For UK companies with a company pension scheme already in place, pensions uptake is on average 55%, and is predicted to reach over 80% after the auto-enrolment process. This will impose significant additional administrative costs on all company pension schemes.

The Association of Consulting Actuaries also found significant opposition to several other requirements with the NEST scheme. Their results revealed that 64% would like the removal of rules on employees who opt out, requiring that they be re-enrolled every 3 years.

Furthermore, 75% of employers oppose the requirement that employees with less than 3 months’ service should also be auto-enrolled. This would force the enrolment from day one of new employees, who may be in a probationary period with the company, and would also force companies who use short-term seasonal workers to include them immediately in their company pension scheme.

Government’s announcement this week that the retirement age of 65 is to be scrapped in October 2011 has given workers the freedom to plan to work beyond 65, for the first time. With no default retirement age, employers have lost the right to require an employee to retire, simply by giving them 6 months’ notice before they reach their 65th birthday.

HSBC questioned over 2,000 UK adults over 50 and found that most would intend working beyond 65, not as a lifestyle choice, but simply through the anticipated need to earn extra cash in retirement.

Recent information in a separate survey from Prudential showed that over half (59%) of UK adults have realised they have not saved enough for their retirement, and believe they will outlive their pension savings.

The Office for National Statistics (ONS) calculated that currently 1.45m people over 65 are still in full-time employment, which means that 12 per cent of ‘retired’ people are actually still in a full-time job. The figure has risen by 84,000 in the past year.

HSBC also believes, however, that many are considering a longer working life as an opportunity to seek out new challenges. David Wells, HSBC’s head of pensions, believes that those now rethinking their pension planning in order to work longer are seeking ways to embrace new skills and challenges that may now only become possible after careful financial planning during their earlier working life.

Making a detailed pension plan to secure a pension income from company or private pensions is best done with quality pension advice, Wells added, and in future is as likely to factor in a working old age, rather than a traditional leisure-based retirement.

The homebuilder Barratt Developments has launched the UK’s first corporate Individual Savings Account (ISA) as a savings incentive for staff. The ISA will offer an accessible and attractive alternative to other forms of saving, such as paying into a company pension scheme.

Barratt’s is working with Legal & General to offer its workers an ISA with access to 10 investment funds. The ISA functions as a normal stocks and shares ISA account, which means that savers can pay in up to £10,200 per year, and enjoy tax advantaged growth on their cash. Barratt employees can save lump sum contributions of at least £200, or have regular savings deducted from their salary and paid directly into the ISA.

The initiative will offer younger workers in particular an attractive opportunity to save, but without locking their money away. By using the ISA, savers have easy access to their cash, but can build up a substantial ’nest egg’ that could form the basis of pension saving, later on.

Recent studies have identified a reluctance among younger workers to save into pension schemes, because they do not wish for their money to be ‘locked away’ until they retire. Halifax published a report which showed that the average age for starting a pension was not until 32, indicating that workers in their 20s, who may be marrying or buying their first home, prefer to keep their cash within reach, and were relatively unlikely to set up a pension as yet.

The trend was confirmed by Scottish Widows in it’s Pensions Report June 2010, which looks at all aspects of pension savings behaviour. One conclusion of the report was that the groups which tend to save well into their personal pensions and company pension scheme were married people and those in their early 40s, and that ‘young people lag behind’ in the pensions saving league. The new Barratt ISA account is certain to offer a savings structure that will appeal to the younger employee, and Legal and General claims that ‘company ISAs are set to revolutionise participation in company saving schemes’.

The Government has changed its mind again on planned changes to the age for taking the basic state pension.

Work and Pensions Secretary Iain Duncan Smith has said that the age could now be raised to 68, and sooner rather than later, in a newspaper interview this week. A more exact timing for the intended change was not given.

For the Government, a deferment of one year in the age for the basic state pension would add 1% to GDP, he claimed.

Mr. Duncan Smith also suggested that the age for taking the basic state pension could be indexed to change with increases in life expectancy, as already happens in Denmark.

For some time, the Government has been planning a more rapid increase in the age for taking the basic state pension, compared with the schedule of the previous Labour Government. Labour had envisaged taking the age for the basic state pension to 66 by the year 2024 and to 68 by 2046, reflecting new data on longevity which shows that we are now expected to live into our 80s.

A Government source was quoted in ‘The Times’ newspaper within the past month as saying that the state pension age would now rise by 1 year every 5 years, until the age for taking the basic state pension reached 70 around the year 2035. This would have meant that a person aged 45 today would have been the first person unable to draw their basic state pension until they reached 70. That proposal would now seem to have been superceded, given the words of Iain Duncan Smith.

The Government’s constantly changing thinking on the entire pensions area has left even the Revenue (HMRC) admitting that they have difficulty keeping up. Pensions experts have described the Government’s numerous proposals and counter-proposals over the past year as ‘tinkering’ around the edges of the pensions system.

In addition to the basic state pension, Government has suggested it may also review the role of the National Employment Savings Trust (NEST), to change the scope of the scheme. The NEST scheme was planned to provide a pensions income through company pensions schemes to all who did not actively opt out of the scheme. However, pensions minister Steve Webb has pointed to the huge administrative cost to employers of meeting the requirements of the NEST scheme, and suggested that utilising existing infrastructures to provide a more generous basic state pension could be a more reasonable option.

The government has announced plans to review some private sector company pensions in a way that may reduce pension income for employees.

The pensions minister, Steve Webb, has announced that future pension income from certain schemes may now be linked to the Consumer Prices Index (CPI), breaking the link to the Retail Prices Index (RPI). While both indices are used as a measure of inflation for pension income from company pension schemes, the CPI index generally rises more slowly than the RPI and would therefore significantly reduce future pension income. The CPI has risen more slowly than the RPI in 17 of the last 20 years.

The plan is being seen by experts as a way of cutting the costs of company pensions obligations in relation to all final salary pensions schemes, in the hope that the schemes will be kept open to new members.

Final salary schemes are the most generous type of private and public sector company pensions, as they have hitherto provided a pension income related to final salary at the time of retirement. However, in times of recession, when the investments underlying final salary company pensions schemes fail to perform, the guarantee remains and the company itself must shoulder the shortfall to meet its payment obligations.

The proposed changes, which would come into effect in 2011, would affect an estimated 25-50% of company and occupational pension schemes.

It remains to be seen, however, how many companies can be persuaded to retain their final salary schemes, even under the new, cheaper regime. With over 90% of final salary schemes already closed to new members, and many of the remainder already beleagured by heavy deficits and the effects of increasing longevity among retired members, many speculate that final salary company pensions will soon be no more than a cherished memory in pensions history.

As such it is a pension plan model that in future could be extended to the pension schemes of the civil service, the NHS, local government, the fire service and the police.

The BBC is proposing to cut the link between pensionable pay and actual pay, so that the final salary pension plan will not be based on your salary at retirement, but on your salary this year. To put it another way, perhaps the term ‘current salary’ pension plan might now be more appropriate.

For the BBC and other pension schemes adopting the model, any future increases or promotion-related raises in salary would no longer be taken into account, when calculating the retirement income from company pension schemes.

For BBC employees, and for public sector workers in future who may be subject to the same pensions model, pensionable salary may run well behind what they are earning at retirement, and the farther you are from retirement today, the larger the gap will be. For many, income from company pension schemes may also have failed to keep in step with inflation, which is predicted to run at around 2.5% for the foreseeable future.

The BBC’s strategy addresses the deficits in final salary pension plans that have been experienced by many large employers over the past 5 years, as stock market investments in particular have failed to provide their company pension scheme with sufficient returns to meet salary guarantees to retiring staff. The new approach is an attempt to find a compromise between capping the deficits that are mounting within final salary company pension schemes, and closing them completely to new members, as so many companies already have done.

The effects of auto-enrolment for businesses are not understood by 69% of employers, despite the fact that it may increase pensions  uptake in the average company from 55% to 80% after 2012. This is when the government pensions initiative the National Employmenet Savings Trust (NEST) will be launched.

The claims have uncovered a knowledge gap that highlights a strong need for pensions advice and pensions planning on a nationwide basis, according to accountants PriceWaterhouseCoopers.

“Some UK employers face millions of pounds in additional costs from 2012, when they will have to automatically enrol employees into a pension scheme, and ensure minimum contributions are paid. The cost to employers could be up to £1,000 a year per affected individual,” said Marc Hommel, pensions partner at PriceWaterhouseCoopers.

Hardest hit will be the retail, leisure and construction sectors, where currently up to 90% of employees have no pensions provision.

Auto-enrolment will force employers to make pensions provision for workers from day one, whereas before there was a grace period of several months, before pensions provision for a new employee was necessary. This meant that enrolment was not necessary for seasonal workers who would be employed just for the summer. Under the current pension changes, those employees would have to be enrolled upon joining the company.

The exact scope of the NEST scheme is likely to be confirmed in the budget changes to be announced on 22nd June.

Heavy fines are to be included to punish employers who fail to keep up with their obligations to administer either the NEST or an alternative pension scheme that would exempt them from the NEST.

The new pensions minister Steve Webb has said that the scope of the NEST scheme, which is intended to ensure that all workers have access to pensions, will be looked at again. The NEST scheme is due for launch in 2012, and in its current form is set to raise the percentage of those holding company pensions from the current 55% of employees to around 80% by 2017. The minister said that the structure of NEST as the delivery system for the new pensions will also be looked at.

Under NEST, all workers who do not have company pensions would be ‘auto-enrolled’ into a national company pensions scheme, administered by their employer, but with their pension savings managed by government. Only those who actively opt back out of NEST will not participate.

Since the scope of the scheme would offer entry to a company pensions scheme to all workers, any review of its scope is likely to scale down that plan.

Employers who provide a company pensions scheme through NEST will pay 3% of the employee’s salary into the company pensions scheme, while workers pay 4% and government 1%, giving total contributions of 8%.

However, employees who retire in the future with a NEST pension must also consider that it may affect their entitlement to government pensions credits, which currently provide a state pension ‘top up’ of over £30 per week for those with no other income than the basic state pension. Their income from NEST could reduce their entitlement to pension credits, as these are a means-tested benefit.

Workers who are now 50 or older may also gain little from NEST, as their contributions in the coming 15 or so years are likely to result in an insignificant pension income when they retire.

While much of the pressure on Nationwide’s performance came from pressure on profits due to low interest rates, Nationwide’s deficit in its company pension scheme had also increased from £40m to £331m in its latest accounts.

Nationwide’s company pension scheme is a final salary scheme which offers members a pension related to their salary at retirement and their number of years of service. While that particular company pension scheme is now closed to new members, the commitment to continue payments to those already drawing, or due to draw their final salary pension income will continue for years to come.

Under a final salary company pension scheme, the commitment to a set level of pension income for retired workers constitutes a guarantee that a certain amount will be paid. Where the investments made by the company pension scheme fail to deliver the required returns in any given year – as they did repeatedly during the recent stock market downturn - companies themselves must dig deep into their esources to fund the pension income obligations of company pension schemes.

Nationwide’s current struggle with its company pensions scheme deficit is only one of a series of similar problems experienced by many large UK employers in recent years. Household names such as Barclays, British Airways, Pirelli, Costain, Lloyds and Fujitsu UK have all closed their final salary company pension schemes to new members.

Problems with funding final salary pension schemes in both the private and public sectors have shown an increasing need for workers to consider taking responsibility for their own pensions provision, by looking at personal pension schemes, as both government and employers seek to reduce their pension commitments.

The total company pensions deficit in FTSE 100 companies as of 31 March 2010 was £50bn, which represents a deterioration of £86bn on the position 12 months ago, according to PCS.

Of these, 12 companies have company pensions liabilities of more than £10bn, with Royal Dutch Shell claiming the largest deficit of £36bn.

Many of those companies showing deficits in their company pension scheme have a final salary scheme, where the company undertakes to pay employees a guaranteed level of pensions income. This is calculated on a percentage of their final salary when leaving the company, combined with their number of years of service.

When the stock market investments underlying final salary company pensions fail to perform, the pensions liability to current and former employees does not go away – leaving the company itself to ‘stump up’ the additional funds required for present and future company pensions payments.

Due to the lamentable performance of stock markets in the latter half of the last decade, the deficits contained in many final salary company pensions schemes have been sky-high. Household names such as British Airways, the Post Office, Barclays Bank, Fujitsu, Pirelli, and Lloyds Bank have all been hard hit by liabilities under their final salary company pension scheme.

As a result, PCS has now claimed that the rapid pace of final salary scheme closures was likely to lead to the “end of the road” for this type of company pension scheme.

A separate report by Aon Consulting asked 82 mid to large employers in the UK – including finance directors of FTSE 100 companies – about their company pension scheme, and found that 4 out of 10 said their company pensions liability posed a ‘very high’ or ‘high’ risk to the business.