Automatic enrolment of new employees into occupational pensions could lead employers to seek ways of cutting contributions to reduce overall costs, warns Scottish Equitable pensions development director Stewart Ritchie.
Research by the NAPF has shown that auto-enrolment typically increases employee take-up from 60 to 90 per cent.
However, the chairman of the Employer Task Force on Pensions, Sir Peter Davis, has suggested that many company finance directors will cut their contributions if auto-enrolment becomes compulsory to ensure the change is cost-neutral.
Ritchie says this means that employees already in schemes with attractive employer contributions will be punished.
Similarly, he says if auto-enrolment is only enforced on companies that contribute, say, 3 per cent of employees' salaries, many companies will cut their contribution to a level below this to opt out.
Ritchie is also concerned that many employers may raise the salaries they offer or provide equity incentives in lieu of employer pension contributions to bypass auto-enrolment.
Davis has conceded that many company finance directors are secretly pleased when their schemes have low take-up because of the cost saving.
Companies offering schemes with no employer contributions are likely to be exempt from auto-enrolment, so many low-paid workers will not benefit. Moreover, these employees may be disincentivised to save by missing out on pension credit, so many may instead focus on paying off their mortgage or saving through Isas.
Scottish Equitable runs a number of auto-enrolment schemes for employers but says take-up, even prior to any compulsion, has been low among small and medium-sized firms.
Ritchie says: “Auto-enrolment could be an incentive for good employers to become bad employers. We fully support the concept but there is a lot of concern as to how this will work in practice. Like many pension measures, there could be a lot of unintended consequences.”