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John Lawson: How will firms cope with pensions vs pay rise dilemma?

With just 10 months to go before automatic enrolment contributions start to rise from their current minima of 1 per cent plus 1 per cent, how do employees and their employers view the prospect? This is something we aimed to find out in our fourth Working Lives report. The results are surprisingly positive.

Taking employers first, three-quarters say they are confident in their business’ own financial situation and the wider economy. Only 9 per cent do not feel confident.

When it comes to the increase in auto-enrolment contributions, over half do not think it will make a difference to their business. This is either because they are already paying more than 2 per cent into their employees’ pensions or their finances are in good shape.

However, the remainder will have to recover costs from elsewhere, with 20 per cent saying it will impact employee pay rises.

This is a concern, considering another recent survey conducted by the Chartered Institute of Personnel and Development, which suggests employers think pay rises over the next year will average just 1 per cent.

With employees facing their own 2 per cent increase in pension contributions, they could experience a cut in take-home pay.

Inflation is not helping either, with the Bank of England predicting a rate between 2 per cent and 3 per cent for early 2018. With this in mind, there is a real prospect that up to a fifth of employees could experience a pay cut of as much as 4 or 5 per cent when auto-enrolment contributions take a step up next April.

Despite these potential headwinds, 44 per cent of employees feel confident in their own financial security, up 3 per cent since last year. And as far as pension contributions are concerned, 50 per cent of those facing higher contributions say they will keep saving, with only 4 per cent definitely planning to stop paying into their pension. The remainder are either undecided (34 per cent) or thinking about stopping their pension (12 per cent).

Although it could be seen as a negative that 16 per cent of employees are thinking about or definitely planning to stop their pension, these figures should be cause for optimism. If we cast our mind back to employee surveys conducted pre-auto-enrolment in 2012, many predicted opt-out rates of between 25 per cent and 35 per cent. As we now know, the  opt-out rate hovers around 10 per cent.

When it comes to expectations of what auto-enrolment will deliver, employees are less well informed. Two-fifths believe their workplace pension will provide enough to live comfortably or at least to get by.

Our response to the auto-enrolment review calls for contributions to rise to 12.5 per cent over time. This level of private saving is enough for most people to maintain a comfortable standard of living in retirement.

While it is right to wait and see what  happens when the 2018 and 2019 increases become real, that should not stop us thinking about longer-term savings needs. A more modest rate of contribution growth than those scheduled might also be helpful in inflicting less pain on workers and their employers, particularly during challenging economic conditions.

John Lawson is head of financial research at Aviva

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