New report criticises introduction of compulsory workplace pensions

Posted on September 2nd, 2011 | Categories - News

A new report from the Association of Consulting Actuaries (ACA) has criticised the government’s plans to introduce compulsory work place pensions saying it will lead to pension savers being significantly worse off in retirement as the reforms will force employers to cut their contributions to existing workplace schemes.

Compulsory contributions

Around four in 10 private companies offer a pension to their staff however auto enrolment will mean that from next year employees will have to be enrolled into a workplace pension and make contributions, the employer will also have to make payments on behalf of their employees.

Although auto enrolment will start in 2012 only the largest companies will be affected, smaller companies with workforces of less than 50 will not be caught by the new rules until 2014 at the earliest.

Despite being automatically enrolled an employee does still have the option of opting out, although the rules are designed to encourage continued membership.

Employers will be allowed to decide which pension an employee is automatically enrolled into, although the scheme must meet certain criteria. If an employer does not designate a particular scheme contributions will be paid into the government’s scheme called Nest.

Report findings

The ACA surveyed 468 employers whose existing pension schemes are worth more than £110 billion and found concern over the new auto enrolment rules.

The report found that 27% of companies are likely to respond to the new rules by reducing their pension contributions and that 35% of the UK’s largest employers plan to cut pension funding for their employees.

Critics of auto enrolment have said that the new rules will lead to a cut in existing pension contributions to help fund the new payments that employers will have to make, thereby penalising employees who are already making provision for their retirement.

The chairman of the ACA, Stuart Southall, said that the report’s findings were “alarming” he also said that it highlighted “a clear danger of more leveling down” in pension funds. He continued “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.”

However a spokesman for the Department of Work and Pensions defended the plans for auto enrollment saying it will “give millions of people the opportunity to save into a pension with a contribution from their employer”. The spokesman continued “Only one in three workers in the private sector is contributing to a workplace pension and our research indicates that 94 per cent of employers say they will maintain or increase their contribution levels.”