Employers to slash pension contributions when auto-enrolment begins

Many large employers may level down their contributions to employees’ pensions once auto-enrolment begins in 2012, the Association of Consultuing Actuaries (ACA) warns.

Auto-enrolment, the brain-child of the previous Labour Government, will see employers contributing an intial 1% of employees’ earnings to a defined contribution scheme, rising to 3% by 2017. But most employers that are currently contributing to employee pension schemes already contribute at a much higher level – typically about 6% of basic pay.

The ACA says that its recent survey of 210 large private and public sector employers, with combined pension scheme assets of £166 billion, found that 41% of them said they are highly likely or likely to level down contributions, reducing future benefits to members, principally their pensions. The report also found under half of employers polled had budgeted for the cost of auto-enrolling employees.

Other findings from the ACA survey include:

  • 70% of employers polled said the auto-enrolment regime “appears complex”.
  • 75% support the principle of auto-enrolment.
  • 64% said the rule requiring employers to re-enrol – every three years – those who opt out should be scrapped.
  • 73% want minimum pension contributions to be based on a percentage of basic pay rather than full earnings, as required by the Pensions Act 2008.
  • more than 60% said employers with fewer than five emplyoees should be exempt from auto-enrolment.

ACA spokesman Steve Leake said the association could not say if employers in any particular sectors were more likely to level down their pension contributions but added that it is “far more likely” to happen in those sectors where many workers do not already have pensions “such as retail”.

Stuart Southall, ACA chairman, said that the costs of auto-enrolment should be “addressed and tested as soon as possible. Larger employers must act in the run up to 2012”.

Although the coaltion Government plans to introduce auto-enrolment, it has commissioned a review of the process which is due to report by the end of September 2010.

The ACA would like the Government to introduce a higher earnings threshold for employees before they are enrolled; a delay in auto-enrolling employees of very small companies; and a shorter staging period than the current five-year one to reduce the risk of levelling down, “perhaps associated with a delay in the October 2012 implementation of auto-enrolment”.

• Pensions specialist Mercer said that cheaper annuity rates and considerable improvements in equity markets mean the retirement outlook for members of defined-contribution (DC) pensions have significantly improved compared to only a few months ago. Its DC Barometer, comparing annuity price movements and stock market conditions at the end of May 2010 with the end of July 2010, showed that a sample scheme member planning for retirement can work seven months less and still retire on the same income that they expected based on conditions two months ago.

Steve Charlton, a Senior DC Consultant at Mercer, said: “This considerable difference month-on-month shows what challenges and uncertainties DC members face. Exceptional market conditions such as those experienced in May and June can have an enormous detrimental impact on the pension income of DC members that are close to retirement. Yet, a swing in annuity rates, as observed in July, can have a significant positive effect.”

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