Pensions reform and the challenges it creates may have a detrimental effect on retirees. Image courtesy of: Scott Liddell/rgbstock.com
With just over two months remaining before the first employers must comply with their duties under the Government's workplace pension reforms, a new report commissioned by the Department for Work and Pensions
shows the scale of the challenge facing those reforms, with less than one third (31 percent) of private sector employers currently offering some form of pension provision for their employees. In other words, almost seven in ten private sector employers do not currently offer any form of pension provision for their employees.
Under the forthcoming workplace pension reforms, employers will be required to automatically enrol all eligible workers into a workplace pension scheme, unless the worker chooses to opt out. Employers will also be required to make a minimum contribution into the scheme.
The new report is based on a nationally representative survey of private sector employers carried out jointly by the National Institute of Economic and Social Research
(NIESR) and TNS-BMRB
. It shows that the percentage of private sector employers who make some form of provision for their employees has actually fallen in recent years (it stood at 41 percent in 2007). Only one-fifth (21 percent) of private sector employers currently have an open workplace pension scheme (an occupational, group personal pension or stakeholder scheme that is open for new members to join). And just one in ten make a contribution to such a scheme on behalf of their employees. Overall, around one quarter (26 percent) of private sector employees are members of a workplace pension scheme or belong to an arrangement whereby an employer contributes to their personal pension.
At the time of the survey, which took place in the year before the reforms are due to start to take effect, just over half (53 percent) of employers were aware that the reforms would require them to automatically enrol eligible employees into a qualifying scheme. Fewer employers (27 percent) were aware of the requirements regarding minimum contribution rates. Three percent stated that they had put a plan in place to comply with the reforms; this proportion was much higher among larger employers, with one quarter (25 percent) of employees working in a firm that already had a plan in place. Awareness was also much higher among larger employers, who will be the first required to comply with the reforms.
John Forth, one of the report's authors, said that, “This report clearly demonstrates the need for the reforms, but it also demonstrates the scale of the challenge ahead. Many of the very largest employers are ready. But there is still a great deal to be done to spread awareness and build understanding of the reforms among smaller employers, most of whom have barely thought about how they will comply.”
One issue facing employers is the possibility that their employment costs will rise because of the duty to contribute to the pensions of qualifying employees. Around three-quarters (74 percent) of employers expect their total pension contributions to increase as a result of the reforms. The most common ways in which employers expect to deal with such a rise is to absorb this through a reduction in profits (25 percent) or as part of other overheads (22 percent).
For the Government, one concern is that employers may use the new minimum contribution requirements as a form of benchmark, thereby reducing the generosity of any provision that they are already making. In fact, the report suggests that few employers intend to “level down” their contributions for any existing employees; six percent of employers said that they were likely to reduce current contributions for those employees who they planned to keep in their existing scheme.