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Employers forced to reduce employee benefits in preparation for pensions auto-enrolment

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The country's largest employer are considering 'levelling down' their pension contributions to help bear the cost of auto-enrolment coming into effect in 2012.

According to a new report from the Association of Consulting Actuaries (ACA) 41% of employers are ‘likely’ or ‘highly likely’ to level-down (reducing future benefits in existing and in new schemes relative to existing ones) to meet the additional cost of these newly pensioned employees; although to date under a half have actually budgeted for any cost. 

The ACA survey gathered responses from 210 large private and public sector employers1 with combined pension scheme assets of £166 billion.

The report also shows whilst 75% of employers support the principle of auto-enrolment, 70% feel the auto- enrolment regulatory regime ‘appears complex’ and 64% say the new rules requiring employers to re-enrol ‘opters-out’ every three years should be removed

Three quarters say employees with less than three months’ service should not be auto- enrolled, as required under the new rules and 73% want minimum pension contributions to be based on a percentage of basic pay rather than full earnings, the latter being the basis in the Pensions Act 2008

More than 60% say that employers with fewer than five employees should be exempt from auto-enrolment. 

On National Employment Savings Trust (NEST) the organizations responding to the survey have mixed feelings.  Half (49%) agree with its establishment.  The remainder is split between those who would prefer existing commercial organisations (22%) to fulfill the NEST role (although there seems no great enthusiasm from providers to undertake this role) and those disagreeing with the entire concept (29%), largely made up of the quarter of respondents who are opposed to auto-enrolment.  

Just over half the organisations (52%) favour a delay in introducing auto-enrolment, which at present will begin in October 2012, whilst just under a half (47%) say a delay is needed until the Government passes legislation to allow greater freedom for employers to offer more flexible pension designs than is possible at present.

ACA Chairman, Stuart Southall said: "Whilst the full cost of auto-enrolling all eligible employees will not hit most organisations until 2017, it is only right that the costs of auto-enrolment, including the administrative challenges, are addressed and tested as soon as possible.  Larger employers must act in the run-up to 2012.  That is why we have welcomed the review commissioned by the Coalition Government and have separately made our own recommendations as to how the overall policy can be simplified and improved, taking account of the need to support ‘quality’ provision and against the much changed financial backcloth since the reforms were first launched."

And in response to the findings, the ACA has proposed a higher earnings threshold before employees are auto-enrolled.  This would help to avoid mis-selling to those on lower incomes who might lose valuable State benefits whilst only receiving a small additional private pension. 

It has also called for a delay in auto-enrolling employees of micro employers, but with the NEST trustees having a statutory duty to advise the Government on when auto-enrolment is practicable for this group.  This action would radically reduce the administrative challenges in the early years.  Otherwise, over 1 million employers, including those with just one employee, will be required to introduce auto-enrolment with sizeable resources needed to make regulatory checks.

It calls for a shorter staging period than the current five years is recommended to reduce the risk of levelling-down, perhaps associated with a delay in the October 2012 implementation of auto-enrolment and a relaxation in the rigid timescales for auto-enrolment so as to recognise practical difficulties in enrolling employees, with the re-enrolment requirement every three years being removed.

Finally the ACA has asked the Government for an easing of the DC contribution test to reflect employers’ payroll practices allowing them to satisfy one of three tests (and, similarly, the exemption criteria for defined benefit schemes, notably those for career average and hybrid schemes, should be radically simplified); and the anti-inducement procedures (to stop employers encouraging employees to opt out) are highly ambiguous and, in particular, need to be clarified for organisations operating a flexible benefits plan.