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Will employers claw back increased cost of pensions?

by on February 10, 2016

The CIPD have today issued a press release (reproduced below) highlighting the impact of increasing enrolment in workplace pensions for employers.  In particular, when combined with the forthcoming changes to UK minimum wage (the so-called living wage) this raises concerns that employers will look for other ways to reduce their wage costs.  While the CIPD (see blow) focus explicitly on the pension implications, there are also potential impacts on employees psychological contracts.  That is to say, the understanding between employees and employers of their respective sides of the bargain.  While employees may see pensions as a long term issue, increase costs for employers may result in them expecting increased effort and productivity right now.  This could result in tensions at work for employees of all ages.

CIPD press release issued today:

More UK employees in a workplace pension but employers are feeling the pinch

Two-thirds of UK workers are now saving through a workplace pension scheme, thanks to automatic pension enrolment, but seven in ten employers are feeling the impact in cost terms. While the focus must remain on encouraging employees to save into a workplace pension, the pressure is on for employers to improve productivity before other elements of the reward package and profits suffer, particularly as the introduction of the National Living Wage approaches.
This is according to the latest Employee Outlook: Focus on employee attitudes to pay and pensions from the CIPD, the professional body for HR and people development. The survey of over 2,000 working adults finds that two-thirds (66%) of employees are now saving through a workplace pension scheme, up from the 45% recorded in 2010. This figure increases to 74% if those earning less than £10,000, who are not eligible for automatic enrolment, are excluded.
However, 70% of employers who have gone through automatic enrolment noted the financial cost on their organisation. The most common reactions to these costs include taking lower profits/absorbing costs (21%), paying the statutory minimum pension contributions for automatically enrolled staff (15%), reducing or stopping wage growth (10%) and reducing other elements of pay (10%).
Charles Cotton, CIPD Performance and Reward Adviser, comments: “Many pension commentators have suggested that workers and firms aren’t paying in enough to their workplace defined contribution schemes, but this research encouragingly shows that most employers and employees are contributing well in excess of the minimum rates required under automatic enrolment. However, employers are clearly taking a hit and this is likely to become more of a problem as the introduction of the National Living Wage in April and the Apprenticeship Levy in 2017 edge ever closer.
“What is particularly worrying are possible changes to how pension contributions will be taxed in future. Taxing pension contributions or introducing a single rate of tax relief would result in a significant administration and cost headache for many employers. If changes have to be made then they should come in after 2018 as auto-enrolment will be complete and organisations will have had time to measure and respond to the impact of these other new initiatives. Employers need to be protected too, so for the moment it’s better to stabilise, rather than rush through changes that will put unnecessary strain on many organisations.”
One way of being able to increase pension contributions without cutting back on other parts of the payroll is if employers are able to improve their productivity. Indeed, among the 32% of employers that increased salaries by more than 2% in 2015, 28% were able to do so through productivity improvements. However, so far, just one in eight employers (12%) have actually taken steps to review working practices and job design in order to increase performance, and this figure is much less (8%) for small businesses.
Cotton continues: “While many ways of boosting performance may now only be marginal, especially in sectors subject to legal requirements, if employers can make enough small changes then they can really boost their productivity. What all employers need to do is review the way their organisation operates and identify the areas where improvements can be made, before deciding the task is too great.”

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