Arguably, the most controversial plans announced so far by the new coalition government are a radical shake up of state pensions. These include a fast track review of the rise in the retirement age to help reduce the deficit and to reflect the increase in life expectancy, as well as a plan to scrap the default retirement age.

Reactions to these plans have been mixed. Unions and campaign groups have argued that these changes will penalise manual workers and the poorest in society, who live in areas where life expectancy is lower. The business community on the other hand, has welcomed the rise in retirement age, but equally, it has expressed concerns about the practical implications and risks for employers of the scrapping of the default retirement age.

So how will these plans affect businesses and employees and, are there practical things that employers can do now to minimise the impact of these changes and help their employees plan ahead for retirement effectively?

Firstly, in the emergency budget in June, the chancellor George Osborne offered people some good news about their pensions. After more than a decade, the earnings link will be restored and a triple guarantee was given that state pensions would increase in line with prices, average earnings, or by 2.5%, whichever is highest. The move back to an average earnings link is said to be worth £600m a year to those claiming a state pension, and has been widely welcomed by both older age groups and retirement experts. Although some argue that this increase will be negated by the VAT rise planned from next year.

At the same time however, it was announced that the government intends to fast track a review into the state pension age. The government plans to increase the retirement age for men to 66 as early as 2016, a decade earlier than planned under the Labour government. Additionally, the retirement age will be reviewed regularly to ensure it is kept in line with rising life expectancy, with suggestions that it will rise to 67 between 2034 and 2036 and 68 between 2044 and 2046. Some ministers are also considering extending it even further, perhaps even to 70 and beyond in future decades. 

These plans have caused an outcry from unions and campaign groups, especially as it's evident there is a widening life expectancy gap between people living in the poorest and most affluent UK areas.

Just this month, new figures from the National Audit Office reported that life expectancy was currently 77.9 for men and 82 for women, however, in the poorest areas this dropped to 75.8 for men and 80.4 for women. Dot Gibson of the National Pensions Convention argues as a result of the life that changes in the retirement age could leave the poorest in society ‘working until they drop’ and called the plans a ‘direct attack on the poorest in society.’

However, while the changes might be seen as unpopular, the government believes they are a necessary step towards addressing the nation’s pensions’ crisis. With one in four babies born now expected to live to 100, work and pensions minister, Iain Duncan Smith said the government has ‘no option’ but to increase the retirement age and this move has also been welcomed by many business groups, including the Confederation of Business Industry (CBI).

Yet more controversial however, is the government’s intention to scrap the default retirement age. For many people, particularly those nearing retirement and potentially affected by changes to state retirement age, the ability to keep working without the risk of being forced into retirement is welcome news.

A recent survey of the over 50s conducted by Saga and the National Endowment for Science, Technology and the Arts (NESTA) found that 61% of respondents wanted to work past their retirement age in order to earn money, 59% wanted to keep their mind active and 50% wanted to work because they enjoy it. It's a fact we're all living longer, we're more active and many of us need to fund a comfortable retirement and so working is inevitable. 

There's particular concern however among the business community that axing the default retirement age could damage businesses and that employers will lose their ability to effectively manage their workforce.

Many business leaders believe that having a clear framework for the timing of retirement, Benefits both the company and employees and that this should not change. The CBI for example, has called for an increase in the default retirement age, rather than a scrapping of the default age. It also believes that if the default age is scrapped then businesses need clear dismissal routes to help them manage. One thing is certain: without a clear dismissal route for staff, businesses could leave themselves open to age discrimination claims and could be saddled with many employees who are no longer fit for their roles. This situation could open their businesses to greater risk and place them under major financial stress. 

Currently, there are no firm plans or a timescale in place for this - in the meantime, the business community are hoping to engage and lobby government so that it carefully considers these plans. We hope that if these plans come to fruition that they will include practical solutions to help employers effectively manage the retirement of their workforce.   

From 2012 onwards, all employers will have to auto-enrol eligible employees into a workplace pension or the government’s National Employment Savings Trust (NEST) and contribute a minimum of 3% of band earnings (£5,035 and £33,540) towards their retirement. Employees will be expected to contribute 5% of earnings, of which 1% will come in the form of tax relief. Employees however, will have the option to opt out, employers will not. Any employee who opts out of auto-enrolment will be re-enrolled every three years. In order to reflect the enormity of the task in hand, the government intends to phase in employer contribution rates, starting initially with larger employers.

The chancellor confirmed that the new government supports Labour’s plans for auto-enrolment and pension reform and will be conducting a review of private pension reform and will be announcing the Results shortly. There is some speculation that the new government may look to scrap the NEST scheme, which has come under criticism for its high initial charges and limited fund choice. Others believe that it may look to increase the lowest earning limit for those to be auto-enrolled from around £5,000 to £10,000 per annum.

The real issue here lies in finding a solution to how auto-enrolment may affect means testing Benefits. As it currently stands, many employees close to retirement age with little pension provision could find that, as a result of auto-enrolment, not only does their income drop as they make contributions into a workplace pension but when they reach retirement, they find that they can’t claim the means tested Benefits that would have been available to them if they had not been auto-enrolled. There are still many areas that we need clarity on, and many believe that the success of the reform will depend upon how the government tackles these issues.

In all likelihood, the government will continue to place a greater emphasis on the role of employers when it comes to providing pension provision. However, the exact shape of this is still to be determined. My advice to employers is to review the pension scheme that they offer their workforce now, and assess whether it meets the government’s proposed requirements for auto-enrolment. 

Employers also need to budget ahead for these changes and consider carefully the cost implications of auto-enrolling all eligible employees into a workplace pension and contributing towards their retirement. For some organisations, the costs may be significant and they may wish to consider effective methods such as salary sacrifice to help manage the potential cost increases.

One thing's certain amidst all these changes - the Challenges of supporting an ageing population is not going to go away and the government will need to continue to find solutions to encourage better workplace pension provision. 

With so much flux and uncertainty around retirement and pensions, it's clear that greater financial education and advice for business leaders and HR directors is needed on how to cope with the changes ahead. Employers need clear information about the many positive actions they can take now to plan ahead effectively for their workers’ retirement, while ensuring their employees can make informed decisions about their own financial futures.