Lowering pension contributions may bring longer term workforce issues for businesses, says expert

Out-Law News | 26 Sep 2014 | 12:33 pm | 1 min. read

Businesses that choose to lower the contributions they make into staff pension pots may save themselves money in the short-term but will have to address other issues that arise later if staff cannot afford to retire, an expert has said.

According to new data published by the Office of National Statistics (ONS), the average contributions paid by employers into defined contributions (DC) pensions scheme in 2013 was 6.1% of an employee's salary. This is a reduction from the average of 6.6% that employers were paying into DC pension pots in 2012.

Pensions specialist Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that the roll-out of auto-enrolment to workers in the UK is a likely cause of the reduction in the average figure. However, she said that businesses that lower the pension contributions that they make risk making it more difficult for themselves in future to recruit younger people and foster innovation through the skills they can bring.

"I have seen nothing amongst our client base to indicate that employers are reducing contributions to existing DC schemes," Saunders said. "However, many have introduced separate arrangements for AE compliance even where they already had a separate DC scheme – and the contributions to those schemes are often just at the minimum AE levels – so that brings down the average."

"In the main, the level of employer contributions to DC arrangements is worryingly low – maybe because, for many employers, the introduction of DC was, understandably, a cost saving exercise and pensions are not the recruitment and retention tool that they were. However as we move in to the brave new world of pension flexibility from April 2015, employers have some hard decisions to take about whether they wish to support their employees to achieve good pension outcomes. In many cases, this will require employers to contribute more and to get involved in financial education programmes for their employees," she said.

"The employers that do not want to or are unable go down this road will need to think carefully about what they can do to protect themselves against the consequences of their employees being unable to afford to retire," Saunders said.