Now that some of the dust has settled from the Government’s long-anticipated launch of their white paper on state pension reform, the implications for employers may be far reaching and may act as a catalyst for further changes in employees’ benefit packages. So, what will this change mean for employers? The biggest immediate impact is for the dwindling number of employers who sponsor defined benefit schemes which are open to the build up of future benefits - the majority of these schemes are “contracted-out” of the State Second Pension (S2P), which will be abolished from 2017. As a result, employers and employees associated with these schemes will have to pay significantly higher National Insurance Contributions. For employees earning around £40,000 per annum or more, this would mean an increase in employer NI contributions in excess of £1,100 per annum – for employees, the increase would be around £500 per annum. Many commentators have suggested that this increase in cost will hasten the demise of defined benefit schemes. To combat this, the government will bring in legislation to allow private sector employers to reduce the cost of future benefits in these schemes (or increase employee contributions) to offset the additional NI contributions Frankly, any employer who believes the tipping point for closing their defined benefit scheme is the addition of these NI contributions should seriously be considering closing their scheme now rather than waiting until 2017. The most frustrating thing for employers who stand behind legacy defined benefit scheme liabilities is that the Government has yet again been able to re-write history on benefits built up to date because they are no longer affordable. Along with increases to the state pension age and the move to the Consumer Price Index to assess future pension increases, the flat-rate state pension will lead to a large number of individuals losing state benefits which they thought were already in the bank. Employers who made past undertakings in good faith which they can no longer afford simply don’t have this choice. Something which also slipped under the radar was the (lack of) impact on pension benefits in the local government sector.These schemes are contracted-out of S2P. However, public sector employers will not have the power to reduce future benefits to offset the future rise in NI costs. Therefore, in absence of further change, local government employers (and hence the taxpayer) will be footing the bill for additional costs while there will be no reduction to employees’ benefits. On a more positive note, paternal employers looking to engage with their employees in saving for retirement should have an easier job in persuading their staff to sign up for pension schemes. The principle of introducing a simple pensions system which everyone understands and can incorporate into their financial planning is to be commended. By making the state benefit easy to work out, it will draw attention to the requirement for individual savings to provide pension benefits in addition to the £144 per week state pension. It will also remove much of the confusion around whether individual savings will merely serve to reduce means-tested benefits and thereby remove one of the barriers to saving into a pension. Essentially, any retirement savings will be retained by the individual. Maybe, together the introduction of automatic enrolment into pension schemes, more people will be looking to say “I’m in” when it comes to pensions. Also, those who continue to work beyond state pension age will not be penalised by losing means tested benefits. As such, a new generation of “silver workers” can potentially reap more reward from continuing to work in later years. This blog by Alan Collins first appeared in Business7's Business News on 18th January 2013.