Big changes on way.

EMPLOYERS and employees need to be aware that there are wide-reaching changes coming our way - probably effective in October 2012.

Some are phased in between 2012 and 2030. There are approximately 29 million people in the UK workforce. About half of them are in "good" occupational pension schemes of which about half are public sector employees (civil service).

Occupational schemes are run by around 9% of all UK employers. This Government has concentrated on those employees who are not in occupational pension schemes, eg final salary-related schemes. This section of the UK workforce has around 10-12 million people in it, which is clearly substantial.

With occupational private sector schemes diminishing all the time, this section is growing.

All of the UK workforce receives a basic State pension (provided they have sufficient National Insurance records). Those employees not in occupational schemes also receive what is called the second-tier State pension ("S2P"). S2P is related to the earnings of the employee.

To put it simple, the more National Insurance you have paid during your employment the higher this pension benefit will be.

In the old days this was called the graduate pension schemes, which then became the State Earnings Related Pension Scheme (SERPS) and now it's the S2P. So far, so good. So what's changing and how good or bad is it? What the Pensions Act 2008 has done It has stopped the rot in the basic State pension (BSP). In 1981 the BSP lost its link with increases in line with average annual earnings. Instead, annual increases were linked to the Retail Prices Index.

This meant that new retirees received a worse State pension over the years. Indeed, it is thought our basic State pension is one of the worst in Europe. In 2006 the Pensions Committee caught on to this and from 2012 the link to earnings will be restored. That's good news, but we have lost a significant amount of BSP over a period of 31 years! That loss will not be recovered. The change simply means that the loss does not increase any further.

The second major thing that the 2008 Act has done is effectively destroying the S2P (as explained above). The S2P will now become a flat rate benefit. To put this in perspective, consider someone who is working from 2012 for 40 years on a salary of pounds 10,000.

Ignore any inflation/salary increases for the purpose of this example. When he/she retires their State pension will be 84% of their last salary. In other words they'll receive pounds 8,400 state pension. That's good. But if using the same example someone earns pounds 30,000 they'll still only get pounds 8,400, whilst clearly this person has paid a lot more in national insurance contributions. Is that fair ? The third major issue is the auto-enrolment into personal accounts - a form of pensions savings scheme. Any employee who is not in an occupational pension scheme will become a member of a pension scheme - like it or not.

Any employee of 22 years or older (up to 65) with earnings over (currently) pounds 5,035 must be enrolled. Eventually the contributions will be 3% employer, 4% employee and 1% tax relief, ie 8% in total. This is levied on the employee's earnings between (currently) pounds 5,035 and pounds 33,540. The employee may opt out of the scheme, but not until after they have joined on a compulsory basis.

Opting out is not easy - there are rules and time limits. There are exclusions. For instance, where an employee is a member of a qualifying works pension scheme ("QWPS"). More on that another time. Employers must pay attention here.

It is your duty to auto-enrol people on their 22nd birthday - not a day later. It is a criminal offence not to do this.

It will also be difficult for employers not to give advice to their staff. However, some guidance material is available on this issue.

Whilst the various issues are still under discussion it is important to consider the options employers and employees have now - in advance of the new rules and regulations being put in place.

Roger Versteeg runs Newcastle-based independent financial adviser Versteeg Lister & Company

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ADVICE Roger Versteeg of Versteeg Lister & Company.