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New delay adds to concerns over levelling down

The Government has given employers the green light to contribute only 1 per cent to their employees’ pensions for an extra year, meaning members may not receive the full 3 per cent contribution until October 2017.

The delay will earn the Treasury £2.4bn. Auto-enrolment on a 1 per cent employer contribution will still begin in October 2012 but previously firms had to increase the amount they were paying into employees’ pensions to 2 per cent in October 2015 and then to the full 3 per cent contribution by October 2016.

In the pre-Budget report, Chancellor Alistair Darling has delayed this increase so that employers are not required to boost their contribution to 2 per cent until October 2016 and then reach the full 3 per cent by 2017.

Businesses set up after October 2012 will have until 2015 to begin auto-enrolling staff.

The Department for Work and Pensions says the move is designed to help firms hit by the recession and is sensible for employers and employees.

But the Association of British Insurers has blasted the plans. Acting director-general Maggie Craig says: “When the Government first announced the delay of personal accounts it claimed it wanted to avoid “another Terminal Five” despite the damage to savings for the low-paid and the uneven playing field it crea-ted for private providers. Now it admits this delay will save £2.4bn at the expense of getting the low-paid saving, which is absolutely vital for their welfare in retirement.”

She adds that the move will encourage more employers to level down. She says: “The chan-ges to the timetable mean that employers will be able to pay just 1 per cent for a full four years with Government backing. This will create a dangerous incentive for employers to join personal accounts and level down from the typical defined-contribution scheme of over 6 per cent.”

Syndaxi Chartered Financial Planners managing director Robert Reid says: “I thought the deferment and the reduction in contribution levels were both stupid and now this. They are just deferring the inevitable. The Government lacks any real chutzpah. Sometimes you have got to take the difficult decisions.”

Standard Life estimates that the delays mean that an employee of a large firm who is 28 years old in 2012 and earns £25,000 would see a 4 per cent reduction in the value of his pension pot by age 68 if his employer sticks to minimum contribution levels.

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