Pension schemes could be devalued to meet new regulations

Pinsent Masons partner Jacqui Timmins explains why employers will be tempted to “level down” their pension contributions.

Employers could slash the value of their pension schemes to bring them in line with new regulations, experts have warned.

The government announced last week that from October 2012, firms will automatically enrol employees onto pension schemes. Those with more than 120,000 staff will be forced to contribute at least 1% to employee pensions and 3% by 2017.

But experts warned employers already offering more than 1% in pension contributions could be tempted to scale back their provisions.

Paul Macro, a senior consultant at professional services firm Towers Watson, said firms keen to ensure they met the new requirements, including the government’s definition of ‘pensionable pay’, would either be left with the “Herculean task” of checking contributions for each worker, or would devalue the whole package.

“A consequence of all of these changes is that we will see a levelling down [in employer contributions]. I can see some organisations saying it’s too difficult to do anything other than the minimum level,” he said.

A National Association of Pension Funds spokesman said: “[Levelling down] is something we are of course worried about – that’s why we are talking to the government. We want to ensure the system is as flexible as possible and is not burdensome so it will minimise the risk of levelling down.”

But Charles Cotton, rewards adviser at the Charted Institute of Personnel and Development, warned companies that devalued their pension provisions would see a negative affect on recruitment, engagement and performance.

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