NEWS
RELEASE

The employers' organisation argues, in its submission to the Government, that auto-enrolment without compulsion is the best way of increasing pensions saving without undermining existing provision.

It recommends a Pension Builder plan to boost employee pension contributions, combined with additional support for smaller businesses - either a Partnership Pension in which government matches employer contributions, or a Pension Tax Credit.

The proposals are based on a fair and equal choice for employers and employees alike to opt out of pension provision, a principle which must be the foundation of the solution, employers believe.

The CBI argues that forcing companies into compulsory pensions contributions would put hard-pressed firms, especially smaller ones, under great economic pressure and significantly raise labour costs while failing to boost savings levels overall.

For companies with existing schemes, particularly larger ones, the increased costs of higher take up rates could actually lead to a levelling down of existing pension provision, the CBI says.

It believes its own voluntary-based proposals will deliver more pension value than Lord Turner's scheme.

John Cridland, Deputy Director-General of the CBI, said: "The CBI wants as many individuals and companies as possible in pension schemes and automatic enrolment is the best way to achieve this; it will overcome the existing inertia about pension provision among employers and employees alike.

"But forcing employers to contribute is neither fair, nor equitable or sensible. As the Pensions Commission says, it is not right to tell a 21-year-old striving to pay off his student debts, or saving for a deposit for a flat, that he must first save for his pension. So why should a small company be forced to pay into a pension scheme if doing so could put it out of business or prevent the creation of new jobs?

"The CBI believes there must be an equal right to opt out for both business and employee so individual economic realities can be taken into account. Our proposals are therefore designed to cajole employers, not compel them, into voluntarily contributing to an employee pension saving scheme."

In the CBI model, companies who choose to opt out will be required to explain their decision to employees, a process which could increase pension take-up rate, Mr Cridland said.

"An active dialogue between employer and employee is also at the heart of the CBI model and, to give the voluntary approach additional 'bite' employers who decide to opt-out will have to explain to employees why they are doing so. In the post-Turner world, with sufficient incentives in place, many employers will not see opting out as a credible option."

Under Lord Turner's proposals for a National Pensions Saving Scheme (NPSS), employees opting in to a pension scheme would contribute five per cent of their earnings - four per cent from their salary and one per cent from National Insurance tax relief. Employers would be compelled to pay another three per cent, a total contribution of eight per cent.

Using these levels as a reference point, the CBI has designed three proposals to ensure as many employees as possible are enrolled in a pension saving scheme. The first could apply to all firms while the Government should pick either of the second and third schemes as an additional incentive and help for companies with fewer than 250 employees.

First, there should be a Pension Builder scheme, based on a successful voluntary scheme in the USA, which would see employees divert a percentage of their annual pay rise from their gross salary into their pension scheme but still enjoy increased take-home pay.

Under the CBI's proposal, employers choosing to opt in to a Pension Builder would still contribute three per cent of an employee's earnings and the individual would pay five per cent - some of which would be salary contribution and NI tax relief, supplemented by a one-off transfer of part of an annual pay rise into their pension.

The scheme would be launched on a specific A Day following a Government campaign to persuade employees of the value of pension provision under this mechanism.

The Pension Builder would not cost the Government any more than Lord Turner's proposals but would help insulate companies from claims for bigger pay rises from employees to compensate for the cost of pensions contributions.

Then, the CBI argues, that the Government could increase pension take-up by providing an incentive for small employers to opt in, choosing between either:

A Partnership Pension which would support smaller employers who would still contribute three per cent but have one per cent of their contribution paid by the Government. Employees would still contribute five per cent, with one per cent of this from existing NI tax relief.

The CBI has calculated the additional cost to the Government of the Partnership Pension would be approximately £555 million per year, assuming 40 per cent of eligible businesses participate and an employee take-up rate of 80 per cent.

Or, a Pension Tax Credit, modelled on the existing Research and Development Tax Credit, to reduce the real costs of pension contributions for smaller companies.

Under this proposal, the employer would still contribute three per cent but receive a tax credit based on 150 per cent of their contribution, effectively reducing it to 2.1 per cent. The employee would still contribute five per cent, one per cent of which would be existing NI tax relief.

The cost of this proposal, the CBI has calculated, would be approximately £475 million per year, assuming 40 per cent of companies opt-in to the scheme and 80 per cent of their employees enrol.

If, despite these incentives, an employer chooses not to contribute to a pension scheme, he or she would be required to inform staff and explain why. The CBI believes this dialogue could convince many employers of the level of demand for pensions among staff and persuade many to reverse their initial decision.

The CBI opposes compulsory employer contributions because:

• The system of employer contributions demanded by Lord Turner will be unaffordable for many businesses who do not have a pension scheme. Smaller firms in particular would be hard hit and suddenly compelling them to find the money for pension contributions could push some to collapse.
• There will be pressure from employees for wage increases to compensate them for new and additional pension contributions. Where employers are unable to resist such demands they could find themselves paying an additional six or seven per cent in pension contributions and salary increases, not the three per cent envisaged by the Commission. This will be most harshly felt among small firms.
• Compulsory NPSS payments will also swell the costs of pension provision for employers who already provide schemes but are struggling with extra costs from rising pension fund deficits, the Pension Protection Fund levy and the demands of the Pensions Regulator.
• Higher take-up rates will increase costs for the majority of employers and many will feel forced to level down their contributions towards three per cent in existing schemes. There is a real risk this figure could become the norm, not the floor, for contributions - and compulsion could provoke a longer term shift away from tailored occupational provision.
• Unions will lobby vigorously to increase the employer contribution over time to meet their stated target for a compulsory ten per cent employer contribution.
• Evidence from Australia shows that in a compulsory pension system, there will be less motivation for the Government to provide tax reliefs for private pension savings, again undermining existing occupational arrangements.
• Without a consensus for compulsory employer contributions - which does not currently exist among political parties and key interest groups - the scheme might not prove durable in the long term, further destabilising a system which has suffered from 20 years of constant change.

Adam Powell, CBI press office, 020 7395 8086, out-of-hours pager 07623 977 854.