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Employers may cut benefits to accommodate auto-enrolment

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Employers could reduce the benefits available in workplace pension schemes as a result of plans to introduce auto-enrolment for all workers.

Under the proposed scheme, which is due to begin a phased introduction in October 2012, employers will be obliged to enrol all employees in a pension scheme if they are not already in a qualifying scheme.

Individual workers, though, can choose to opt out.

Firms will contribute 1 per cent of an employee’s salary to the fund initially, with the figure rising to 3 per cent by 2017. Individuals will need to contribute 4 per cent of their salaries to the new scheme, while the government will add a further 1 per cent in tax relief.

At the moment, the average employer contribution to existing pension funds is 6.1 per cent of employee earnings.

However, a survey by the Association of Consulting Actuaries (ACA) has revealed that four out of ten of those firms polled intend to level down their current schemes in anticipation of a flood of new members.

Many employees could find themselves having to pay more in order to maintain the value of their future retirement incomes.

Hardest hit could be those on middle incomes, with cuts amounting to as much as 50 per cent a possibility.

According to the ACA report, 41 per cent of employers say that they are ‘likely’ or ‘highly likely’ to level down future benefits in existing and in new schemes relative to existing ones as a way of meeting the additional cost of newly pensioned employees.

While three-quarters of employers support the principle of auto-enrolment, 70 per cent believe that the auto-enrolment regulatory regime appears complex.

Some 64 per cent thought the scheme should be simplified by dropping rules that require employers to re-enrol ‘opters-out’ every three years, and 75 per cent considered that employees with less than three months’ service should not be auto-enrolled.

Additionally, three-quarters (73 per cent) want minimum pension contributions to be based on a percentage of basic pay rather than full earnings, and over 60 per cent said that small firms – those with fewer than five employees – should be exempt altogether from auto-enrolment.

On the subject of the National Employment Savings Trust (NEST), which will manage the funds for the new pension members, ACA reported a mixed response.

A half (49 per cent) agreed with plans to set up NEST. The remaining respondents were divided between those who would prefer existing commercial organisations to fulfil the NEST role and those disagreeing with the entire idea, a group largely composed of employers who are opposed to auto-enrolment.  

Just over half (52 per cent) favoured a delay in introducing auto-enrolment, and 47 per cent said 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.

The ACA presented its findings as part of the review of the auto-enrolment system which is currently being conducted by the government.

Based on the survey, the ACA itself made a number of recommendations to the review body.

These include raising the earnings threshold before employees are auto-enrolled in order to avoid mis-selling to those on lower incomes.

There should be a delay in bringing smaller employers into the scheme, a move that would ease the administrative burden for many small businesses.

There should also be a shorter staging period than the current five years to reduce the risk of levelling-down, the ACA continued.

The rigid timescales for auto-enrolment need to be relaxed to take account of the practical difficulties involved in enrolling employees, and the re-enrolment requirement every three years should be scrapped.

Anti-inducement procedures, aimed at preventing employers from encouraging employees to opt out, were described by the ACA as highly ambiguous and, in particular, need to be clarified for organisations operating a flexible benefits plan.

Commenting on the survey results, Stuart Southall, the ACA chairman, 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 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.”