Auto-enrolment ‘will lead to cuts in pensions’

The Department for Work and Pensions (DWP) has defended its pensions auto-enrolment plans following a report that suggests firms will cut workers’ pensions when the new rules come into force next year.

A survey of firms by the Association of Consulting Actuaries (ACA) found that one organisation in four plans to cut its workers’ pensions when the rules change in October 2012.

The report revealed that just over a quarter of employers have budgeted for the cost of auto-enrolment, but 27% admit that they are looking to “review their existing pension scheme benefits to mitigate the cost of higher scheme membership”.

Meanwhile, smaller employers are expecting 35% to 40% of employees to opt out of workplace pensions following auto-enrolment.

ACA chairman Stuart Southall said that the results pointed to a rising trend among employers of all sizes to review existing pension arrangements and, given the economic climate, a number are seeking ways to reduce their pension costs.

“As things stand, there is a clear danger of more ‘levelling-down’ – a trend which our surveys have identified for some years now,” Southall said. “With contribution rates into many schemes failing to keep pace with the pension costs of longer lifespans, and with employers expecting – and in some cases relying upon – high anticipated levels of pension opting-out for budgetary purposes to keep their auto-enrolment costs down, warning bells are ringing.”

At present, around 38% of UK private sector employers provide a workplace pension scheme, but all will be required to auto-enrol their employees into a “qualifying workplace pension scheme” between late 2012 and early 2016 under the Government’s pension reforms.

In response to the report, a DWP spokesperson defended the plans, saying: “Automatic enrolment from 2012 will give millions of people the opportunity to save into a pension with a contribution from their employer.”

“We are bringing in the reforms gradually precisely to help businesses adjust to the change and are introducing measures including a three-month waiting period to save companies £170 million each year.

“However, only one in three workers in the private sector is contributing to a workplace pension and our research indicates that 94% of employers say they will maintain or increase their contribution levels. It also shows that the majority of employees say they’ll continue saving once enrolled and for those who do opt out they will be automatically enrolled again every three years.”

For more information on pensions and auto-enrolment, see XpertHR’s range of information and resources on the topic.

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