Secondary Pensions – two words that will be part of everybody's budgetary vocabulary by 2020. Up until now, there has been a massive grey area in where the responsibility lies for our retirement - are we personally responsible for ensuring that we are financially stable in our old age, is it the responsibility of our employers or is it the duty of the States of Guernsey to secure that financial stability? Come 2020, the answer is… a little bit of the three.
It is estimated that around 60% of Guernsey residents of working age have no personal pension plan, with the concern that many of these 25,000 residents will be solely dependent on the States pension and tax-financed benefits in later life. Notwithstanding the unsustainable strain this places on public finances, in many cases this will lead to a poorer standard of living for those individuals in retirement.
It has been a long journey to get to this point, with the 2015 debate on the States of Guernsey Personal Tax, Pensions, and Benefits Review introducing a proposal to address the provision of adequate personal or workplace pensions in Guernsey and Alderney. Its primary objective was to ensure that people of working age are making proper financial arrangements for their retirement (as a supplement to the States pension, should they be eligible). The hope is that retirees will experience a greater increase in their retirement income, while lessening the burden on the taxpayer (and tax payers of the future) in reducing the number of those claiming means-tested welfare benefits in later life. Whilst we are yet to see a draft law, and the devil may well be in the detail, we are privy to the proposals approved by the States which will form the basis of the law. The following is a brief summary of those proposals and how they will affect employers and employees in Guernsey.
In short, the proposals seek to implement a semi-compulsory obligation on employers to enrol employees into a States' backed secondary pension scheme, or a private qualifying scheme (the Scheme), in addition to the mandatory social security contributions already made by both employers and employees.
The proposals will place a legal duty on the employer to enrol the employee into a qualifying scheme. The employee will then have the option to opt out, should they choose, however there will be an obligation on the employer to re-enrol the employee every three years. At that point the employee is, again, free to opt out and the process continues ad infinitum, or at least until eventual retirement.
Under the proposals, employers are required to contribute at a minimum level into the States secondary pension scheme, or a private qualifying scheme. The employers' contributions will be tapered, beginning at 1% and increasing to 3.5% over seven years. Similarly, it is envisioned that employees will start by paying in 1% increasing to 6.5% over that seven year period.
Employees who already pay into a private pension or Retirement Annuity Trust Scheme (RATS) will not be required to pay into a new scheme as well, provided that the private pension or RATS meets the qualification criteria, the specifics of which are yet to be confirmed. It is anticipated that most RATS and private pensions will fall under the eligibility umbrella; however there may be some which do not. For example, most multi-member RATS are likely to be eligible, however single member RATS will not be.
What does this mean for Guernsey employers?
There are a number of practical considerations for employers.
Despite the attractiveness of providing pension benefits for employees, a surprising number of Guernsey employers do not offer pension benefits to their employees, preferring instead to leave the burden of retirement planning on the individual. More often than not, the need for the cash now (with mortgage repayments, childcare and school fees) outweighs the prudence of "saving" for retirement. Introducing an obligation on an individual to "save" for retirement will obviously affect an employee's take home pay, but what about the impact on employers – who will, come 2020, have an obligation to contribute towards an employee's retirement?
For employers who already provide pension benefits, the Scheme will have no impact.
For employers who do not already provide pension benefits for their employees, the Scheme is going to have an impact. For those employees who do not "opt out" (see our comments below), employers will need to contribute up to 3.5% into the Scheme on behalf of employees. It will remain to be seen whether the law will specify that the contributions must be in addition to an employee's current remuneration – although as employees will also have to contribute to the Scheme, and up to double the amount that an employer will have to contribute, it would make sense that an employer would not be able to deduct that "additional contribution" from their existing remuneration. This will obviously add to an employer's overall wage costs.
Sometimes, businesses who do not offer private pensions as part of their employee benefit package provide higher rates of remuneration to "compensate" employees for this. This may or may not be specifically referenced in the contract of employment. In these circumstances, arguably, unless the contract already refers to a specific amount being attributable to pension, from a contractual perspective, it would be a breach of contract to deduct the additional employer payment contributions from employee's salary without their consent. Contracts of employment will therefore need to be reviewed and potentially updated once the detail of the new law is released.
Employers may look to implement an effective "pay freeze" in order for the business to regulate their financial position in respect of the contributions. This could lead to problems with recruitment, or a decline in staff morale – or both for obvious reasons – neither of which are attractive for employers.
Of the 2,500 employers in Guernsey, 69% are "micro-businesses" employing fewer than five people. That figure rises to 82% for employers with fewer than 10 members of staff. The impact, not least administratively, on these micro-businesses has not been fully quantified. It may result in enforced reductions to the overall wage bill, or the passing on of these costs to the consumer. It is unclear whether there will be a small business exemption, however it would be difficult to see how the Scheme would be able to achieve its purpose if the majority of Guernsey employers were excluded from its scope.
While secondary pension schemes are a simple idea, its implementation for businesses may prove far more complex; in the absence of trained professionals or human resources department to assist in the running and monitoring of a workplace scheme complying with the new law will likely prove prohibitively difficult for smaller operations. The matter becomes further complicated when dealing with employees moving to smaller businesses with existing pensions that require transferring into a new workplace scheme.
The devil is in the detail
We anticipate that the "devil" will be in the detail of the new law surrounding a number of what will no doubt be topical areas, the most obvious one is that of the ability to opt out of the Scheme.
Firstly, is how to ensure that employees are not coerced into opting out of the Scheme. Where there is likely to be a direct additional cost to employers, it is foreseeable that pressure could be applied to employees to opt out of the Scheme. Given this is entirely contrary to the policy intentions of the Scheme (which is to ensure that everyone is sufficiently provided for in their retirement), we would expect the new law to pro-actively address this risk.
We would also expect employees to be protected from suffering a detriment by not opting out of the Scheme, however the devil will be in the detail of the law as to how this detriment will be framed and then enforced, either by the individual directly against their employer or potentially by the States. Creating a contentious forum in which employees would be expected to avail themselves of a protection provided by the law is perhaps not the most effective means to achieving the policy outcomes, however given the decision to allow for opting out, this may be an unavoidable necessity.
A detailed set of proposals for the Scheme's design and implementation is expected to be put to the States of Guernsey in the early part of this year, following which the necessary legislation will be drafted, and administrative arrangements put in place. Therefore, we are likely looking at 2020 before the Scheme becomes law. Irrespective of the size of the business, all employers should be looking to get themselves familiar with the proposed Scheme and how they intend to ensure compliance in 2020.