· 3 min read · News

One in three employers forced to reduce pension spend in the advent of auto-enrolment, says ACA

Published:

A third of larger employers are looking to decrease their spend on workplace pensions at the very time when they need to be considering the possibility of a higher spend, with auto-enrolment looming over the next year or so, according a report from the Association of Consulting Actuaries (ACA), published this morning.

The report shows just over a quarter of employers have budgeted for the cost of auto-enrolment, with those larger employers that have basing their budgets on expecting between 12-17% of employees to opt-out of workplace pensions after being auto-enrolled.

Smaller employers are budgeting on between 33-39% of employees deciding to opt-out. A fifth (21%) of employers report staff opt-outs from pension schemes have increased.

Further, three quarters (73%) of employers say they are likely to auto-enrol all employees into their existing workplace pension scheme(s), with 21% saying they are likely to enrol all employees into a new scheme. But, 27% of employers say they are likely to review their existing pension benefits to mitigate the cost of higher scheme membership in anticipation of additional costs arising from auto-enrolment, with this rising to over a third (35%) amongst the largest employers.

Conducted over the summer, the ACA survey gathered responses from 468 employers, of all sizes, with scheme assets exceeding £114 billion. At present, 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' under the Government's pension reforms between late 2012 and early 2016.

Employers said staff who did not presently join their schemes mainly because of cost (92%) with 61% also not joining because they felt employees were 'disillusioned with pensions'.

Almost all (94%) of the mainly smaller employers responding to the survey without a scheme said 'cost' was the main reason they did not provide pensions at present. Where final salary schemes are provided, 91% are closed to new entrants with 37% of these also now closed to future accrual of benefits (up from 18% two years ago). The predominant types of pensions provided by employers responding to the survey are Group Personal Pensions, Stakeholder and Trust based defined contribution schemes. Almost half (47% ) of employers do not have a target for their pension costs, but 43% are targeting employer pension costs of 4% of payroll or more. However, amongst employers with 49 or fewer employees - where the bulk of private sector firms are found - only just over a quarter (28%) are looking to a pension spend at or above this 4% level.

Overall, employers responding to the survey report average combined employer and employee contributions into defined contribution schemes ranging between 7½% and 12½% of earnings. Average combined employer and employee contributions into defined benefit schemes remain at over double these levels at 27% of earnings.

Three quarters of survey respondents (73%) of employers say they are likely to auto-enrol all employees into their existing workplace pension scheme(s), with 21% saying they are likely to enrol all employees into a new scheme. A fifth may restrict entry into their existing scheme and auto-enrol the balance of employees into NEST.

At least two-thirds of employers presently offering no pension scheme say they are unlikely to auto-enrol employees into either NEST or an employer's scheme. This suggests many smaller employers have as yet not understood the new legal requirements. Of those that seem to have addressed them, 25% are likely to use NEST and 11% set up an employer's scheme.

Upwards of eight out of ten employers support the recommendations made by Lord Hutton that public service pensions should be scaled back (85%), that member contributions should increase (79%) and that the pension age in such schemes should increase to the State Pension Age (91%). Over half (56%) support the continuation of defined benefit provision for public service employees but, of these, only 16% support the continuation of existing benefit levels.

ACA chairman, Stuart Southall said: "It appears the austerity message has been grasped by many private sector employers as they begin to focus on the potential costs of pension reforms around the corner from 2012. This is understandable but, with not much more than a third of private sector employees now in pension arrangements and with many of these set to deliver very modest retirement incomes, the survey findings are disappointing in terms of the need to boost rather than diminish retirement incomes into the future.

"As things stand, there is a clear danger of more 'levelling-down' - a trend which our surveys have identified for some years now. With contribution rates into many schemes failing to keep pace with the pension costs of longer life-spans, 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.

"Yes, it is good news that auto-enrolment should widen pension coverage, particularly where no pensions are offered at present. Hopefully, the communications campaign associated with the reforms will mean employees' general understanding about the need to save much more for a comfortable retirement will be a success, although I am not sure the Government has as yet really grasped the financial pressures falling on the target groups for auto-enrolment over the next few years. Nor, in my view, have they been sufficiently 'in listening mode' about ways in which they might encourage more employers to do better than simply the basic. The preparedness of employers to share risks, echoed by the survey results, and the endorsement of this approach by the Workplace Retirement Income Commission, to open up new pension designs, needs to be followed up with some urgency."