How proposed pension changes could impact businesses

The Government recently held a call for evidence on a proposal to require businesses to pay into a pension scheme that employees choose for themselves, in place of the employer’s default.

Whilst the proposal’s potential to empower people to engage with their pension savings means it is worth exploring, the expected costs appear to sizably outweigh the expected benefits and ensuring the system works effectively will be a challenge.

With 55% of firms saying labour costs threaten UK competitiveness, unknown policy benefits do not justify known costs…

The CBI’s latest Employment Trends Survey shows that 71% of businesses have been impacted by labour shortages in the last 12 months, and of those affected, more than half (54%) were unable to grow and respond to new business opportunities. This is having a profound impact on businesses, with more than 1 in 5 (22%) having to hold back investment and 1 in 10 (12%) even shrinking due to shortages.

Added to this is decades of rises in employment taxes and regulatory costs, including increases in the National Living Wage, which will rise to £11.44 in April – a 9.8% uprating.

Businesses are therefore understandably nervous that despite the potential benefits of an employee's ‘right to choose’ their own pension pot being as of yet unclear, there are some major potential costs, including:

• Higher pension scheme administration costs: with some staff choosing their own pension there would be fewer employees enrolled on an employer’s default scheme, which would in turn mean higher running costs.
• Fewer pooled pension schemes: fewer people enrolled on an employer’s Defined Benefit or Collective Defined Contribution scheme would mean both the incentive to provide them and their performance could be impacted. These schemes rely on a critical mass of contributors to effectively pool capital, which allows them to invest in higher growth assets.
• Large familiarisation costs: whilst much will depend on the eventual system design, there could be sizeable costs incurred for businesses in facilitating flows of contributions into more than one pension scheme and through having to gain familiarity with the policy. While external payroll providers may be able to help, in many cases it will be employers themselves taking on this administrative burden.

…which is why the CBI has said that other government pensions initiatives deserve priority

The government’s proposal has multiple potential overlaps with other key reforms to the pensions sector that are still being rolled out, including pensions ‘dashboards’, which will help savers keep track of their savings. Proposals to introduce ‘default consolidators’ that combine inactive pension pots and a new ‘value for money framework’ also intend to increase consolidation and drive-up standards.

Allowing these reforms to take hold before any decision on whether to move ahead with a ‘member chooses pot’ model would allow DWP to accurately determine whether the policy need for a LPM remains and would ensure any potential crossovers can be capitalised on.

The CBI has made the following recommendations to government:

1. If a LPM is put in place, there should be exemptions from the requirement to contribute to a lifetime provider for employers that already provide a generous pension. This will limit the policy’s cost to business and will protect employers’ ability to use a pension effectively as part of their employee value proposition.
2. The delivery of the government’s other key pensions initiatives should be given priority over the delivery of a lifetime provider model.
3. Thorough testing of the lifetime provider framework will be needed ahead of the general rollout to ensure a seamless user experience and employers’ and savers’ trust in the policy.

If you have views on the government’s lifetime provider proposal, please contact Laurence Reaburn-Smith, Policy Manager.