By Marcus Leach
A third of larger employers (firms with over 250 employees) 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 to the initial report of the 2011 Pensions trends survey conducted by the Association of Consulting Actuaries (ACA).
The report went on to say that only 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. Reflecting presumably the pressure on employee incomes over the last 3 years, 21% of employers report that member opt-outs from pension schemes have increased.
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.
However, 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 (those with over 5000 employees).
Conducted over the summer, the ACA survey gathered responses from 468 employers, of all sizes, with scheme assets exceeding £114 billion. At present, around 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.
By October 2017, minimum contributions must be 8% of employee earnings, with a minimum of 3% from the employer plus 4% from the employee and 1% by way of tax relief, albeit employees have an opt-out which also removes the employer’s need to contribute.
Employers said that employees 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.
“The results of our latest 2011 Pension trends survey are alarming in a number of ways," ACA Chairman, Stuart Southall said.
"They point to a rising trend amongst employers of all sizes to review existing pension arrangements and, given the economic climate, for a goodly number to seek ways to reduce their pension costs.
"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.”
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