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Reforms could reduce pension injections - PPI

UK - The UK Pensions Policy Institute is warning pensions contributions could be £10bn (€14bn) lower in 2050 than today if employers pay only the minimum contribution when personal accounts are introduced in 2012.

Details of a 50-page study conducted by the PPI takes four basic scenarios for contributions, none of which has preference over another, but one scenario, in particular, notes if employers decide to pay no more than the 3% minimum contribution required of employees, the amount of money being contributed to defined contribution pension schemes will actually be lower than without the government's proposed reforms.

The PPI said a study of current pensions arrangements has found while only 15% of private sector employers offer DC schemes which are more generous than the 3% minimum pensions contribution, "it is important that employers continue to offer more…" because "…in the extreme situation where no employer offers more than the minimum, annual total pension contributions could be £10bn lower in 2050 than without reform".

The PPI used a baseline scenario in its study to assess what could happen without reform, which suggests annual total pension contributions falling from around £40bn in 2006 to around £30bn by 2050, relative to national average earnings.

The earlier survey referred to was conducted by Deloitte in April 2006, of 750 private sector employers, and which revealed employers who paid more than 3% intend to reduce or ‘level down' their contributions because of the increased costs introduced by these reforms, rather than pass on the cost to customers, workers through lower wages, or to shareholders.

In contrast, however, the PPI said should no employer decide to pass on the cost of reforms by reducing contributions, it will actually increased the annual total contributions made all parties - employers, employers and the State - by around £10bn in 2012.

Moreover, if employers do reduce their contributions to keep their pensions costs at a constant level, the reforms will increase contributions by £5bn in 2012, simply because other employers will be compelled to contribute.

Findings therefore reveal employers' responses to pensions reforms will be critical to the actual impact of changes to the level of pension saving, said Nikki Cleal, director of the PPI.

"Some employers have said that they will closed their existing schemes or reduce their pension contributions as a result of the reforms. If employers act in line with a survey of their likely responses, the reforms could increase annual total pension contributions by around £10bn initially, but this could be only around £2.5bn above the level without reform by 2050," said Cleal.

"Given the significant impact that employer and employee behaviour will have on the outcome of the government's private pension reforms, it is important to collect further evidence on their likely responses," she added.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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