Auto-enrolment risk warning

The independent review into the implementation of automatic enrolment risks creating strange incentives for employers and individuals, pension experts have warned.

The Coalition has stressed that it was committed to the principle of automatic enrolment but was reviewing the details. The review team has been asked to look at “the size of firm to which automatic enrolment should apply”. Towers Watson says that forcing companies to provide pensions only once they exceed a certain size could deter employers just below the threshold from taking on an extra member of staff.

The review will also look at whether automatic enrolment should apply from a higher earnings threshold than the £5,035 currently envisaged and/or whether it should only apply where contributions would be above a de minimis level. Experts warn this could risk employees seeing take-home pay fall after a pay rise that took them above the automatic enrolment threshold.

The review is being headed by Paul Johnson, senior associate at Frontier Economics, and also includes David Yeandle, head of employment policy at EEF and Adrian Boulding, pensions strategy director at Legal & General. The three month review will report to government in the Autumn.

Paul Macro, senior consultant at Towers Watson, says: “Taking on a 50th member of staff would be a much bigger step if it meant having to start providing pensions for the other 49. It’s easy to understand why the Government is worried about the costs to small employers but small firms have already been given up to four years more breathing space than big companies.”

Steve Charlton, senior consultant at Mercer, says: “A new Government was never going to sweep away a flagship programme designed to increase pensions saving – too high a proportion of the population find it difficult to access provision for retirement. Automatic enrolment into workplace pension schemes is a logical method of addressing this.”

“Although small employers will find most difficulty in complying with the new regime, they employ much of the target audience for auto-enrolment. Making concessions for them, or for lower earners, would mean missing large swaths of those who are least well served by the current regime, and would thus fail to achieve what the legislation sets out to accomplish.

Clive Grimley, partner at Barnett Waddingham says: “The proposals introduced by the last Government were ill-thought through, unnecessarily complicated and would have placed an unwelcome bureaucratic burden on employers, particularly the many smaller employers who would have grappling with pension provision for employees for the first time.”