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Towers Watson says that employers may be able to take advantage of some cost-saving measures under the UK government’s Pensions Bill 2011. The consultancy notes that this bill amends the requirement for increases to plan pensions and relaxes the auto-enrolment rules, to start in 2012. Towers Watson said that the changes coming include changes to indexation of plan pensions, with the level of mandatory increases to be determined using the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). The consultant report said: "For most plans, deferred pensions will automatically switch to the new basis but this is not the case for increases to pensions when in payment." Towers Watson said that increases based on the CPI usually have been lower than RPI because the CPI is calculated using a different methodology, and the basket of goods and services covered is different. The consultancy notes that the general expectation is that the CPI will show lower increases than the RPI, averaging about 0.5% a year plus an allowance for the housing effect. "Many employers will be able to record windfall gains on their balance sheets as a result of the switch from RPI to CPI. However, the extent of the gain depends on whether legacy pension promises and the wording in plan rules will allow the switch. Employers will need to carefully analyze the impact on their own plan," according to the report. Changes to auto-enrolment rules are also coming into effect in October 2012. According to the Towers Watson analysis, the two main changes are an ‘earnings trigger’, set initially at £7,475 (the level of the personal income-tax-free allowance for the year starting 6 April 2011), and the option of a three-month waiting period. Towers Watson notes that employers do not need to enrol employees in the plan if their earnings are less than the earnings trigger unless these employees specifically choose to opt in. "The band of qualifying earnings on which contributions are based remains unchanged for the time being, and any increases or decreases in these thresholds will be decided by the government rather than linked to inflation."
Towers Watson says that employers may be able to take advantage of some cost-saving measures under the UK government’s Pensions Bill 2011. The consultancy notes that this bill amends the requirement for increases to plan pensions and relaxes the auto-enrolment rules, to start in 2012.
Towers Watson said that the changes coming include changes to indexation of plan pensions, with the level of mandatory increases to be determined using the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). The consultant report said: "For most plans, deferred pensions will automatically switch to the new basis but this is not the case for increases to pensions when in payment." Towers Watson said that increases based on the CPI usually have been lower than RPI because the CPI is calculated using a different methodology, and the basket of goods and services covered is different.
The consultancy notes that the general expectation is that the CPI will show lower increases than the RPI, averaging about 0.5% a year plus an allowance for the housing effect. "Many employers will be able to record windfall gains on their balance sheets as a result of the switch from RPI to CPI. However, the extent of the gain depends on whether legacy pension promises and the wording in plan rules will allow the switch. Employers will need to carefully analyze the impact on their own plan," according to the report.
Changes to auto-enrolment rules are also coming into effect in October 2012. According to the Towers Watson analysis, the two main changes are an ‘earnings trigger’, set initially at £7,475 (the level of the personal income-tax-free allowance for the year starting 6 April 2011), and the option of a three-month waiting period.
Towers Watson notes that employers do not need to enrol employees in the plan if their earnings are less than the earnings trigger unless these employees specifically choose to opt in. "The band of qualifying earnings on which contributions are based remains unchanged for the time being, and any increases or decreases in these thresholds will be decided by the government rather than linked to inflation."