Employers may have to cut benefits to fund pensions, experts warn

31 Jul 2019 By Elizabeth Howlett

Businesses wary of further increases to minimum auto-enrolment contributions, as figures show which sectors are most generous on pensions

Employers are likely to suppress increases to pay and other benefits in anticipation of future increases to minimum auto-enrolment contributions, experts have said, as new figures show which sectors are currently the most generous with their pension contributions.

An analysis of ONS data, by Profile Pensions, found the finance and insurance sector topped the list for largest employer pension contributions in 2018, with an average of 9.5 per cent paid on an average salary of £30,403. 

Education came in a close second at 9.3 per cent, and was one of the only sectors that offered women a larger average pension contribution than men.

By contrast, agriculture saw the lowest average contribution at 2 per cent, followed by the hospitality industry with 2.1 per cent.

Legislation means employers have had to contribute a minimum of 3 per cent to pensions since April 2019. But Nathan Long, senior analyst at Hargreaves Lansdown, dismissed concerns that future increases in minimum auto-enrolment rates would affect participation – a worry widely raised after contributions rose.

Generally, he said, individuals had absorbed the hit to their monthly pay packet. 

But, Long added, employers were wary of potential future increases to minimum contributions – with the pension industry generally in favour of a further increase to 12 per cent from the current 8 per cent (comprising 3 per cent from employers and 5 per cent from employees). As a result, he said, businesses were likely to prioritise spending on pensions ahead of other benefits or increases in base pay.

“It is widely expected that pay rises will be suppressed to cover the most recent increase in pension contributions, but the future is less clear. With the threat of another increase in contributions hanging in the air, it may take a brave employer to drastically increase benefit spend in other areas,” said Long.

He added: “We may see employers starting to change their pension contributions in order to stay competitive with other companies, but it is a bit too early to see any real evidence of this.” 

The ONS data revealed that, across sectors, men receive on average 4.6 per cent in contributions and women get 4.4 per cent, though this gap is larger in certain sectors. The gap in electricity and gas, for example, is 3.2 percentage points, with men receiving 7.4 per cent against 4.2 per cent for women.

Steve Webb, director of policy at Royal London, said the differences in pension contributions for men and women reflected underlying inequalities in the labour market.

“With men tending to dominate more senior posts, and with pension arrangements often more generous for those higher up an organisation, gender differences in pension contributions are unfortunately not surprising,” said Webb.   

With the outcome of Brexit still undecided, Webb also expressed uncertainty around whether private sector employers, often heavily dependent on trading conditions, might have to reduce voluntary contributions amid a “post-Brexit squeeze”. 

“If the economy faces post-Brexit turbulence, employer pension contributions above the statutory minimum level could feel the squeeze, though pension arrangements may have a contractual underpinning and cannot be quickly changed,” said Webb.

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