Pensions White Paper proposals could cost employers £2.6bn

Pensions reforms in the government’s White Paper could cost employers an additional £2.6bn in staff pensions contributions.

Leaked copies of the White Paper, due out this week, estimate that about seven million people in the UK are not saving enough for their retirement.

The government will adopt the National Pensions Saving Scheme (NPSS) suggested by the Pensions Commission, which will require employers to pay 3% and employees 4% of their wages into the fund unless employees decide to opt out. A further 1% will be added through tax relief.

All employees over 22 will automatically be enrolled into the scheme if their employer does not already provide a suitable alternative.

The White Paper says that compulsion will be necessary as participation rates would be significantly lower if the membership of the scheme was voluntary.

The cost to employers is based on two-thirds of staff choosing to remain in the scheme. It would mean a 0.6% rise in labour costs for most companies but a rise of up to 0.9% for small firms.

Details of the leaked document published in the Guardian also propose a three-year transition period to help employers prepare for the scheme and suggests they pass on some costs through higher prices or lower wage rises.

The four central pillars of the white paper are:

  • restoring the link between earnings and the basic state pension from 2012
  • a phased increase in the state retirement age in line with life expectancy
  • greater benefits for women pensioners, particularly those with caring responsibilities
  • the National Pensions Saving Scheme.

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