Fears have been raised that employers are slashing the amount they pay into workers’ pensions in an attempt to save money, after official figures revealed a near-50% collapse in contribution rates in 12 months.
The Guardian reported that the average amount being paid into private-sector defined contribution (also known as money purchase) workplace pension schemes plummeted to 4.7% of a worker’s salary in 2014, when a year earlier it stood at 9.1%, according to the Office for National Statistics (ONS).
The figure of 4.7% is made up of a typical employee contribution of 1.8% of eligible pay, plus a contribution from their company of 2.9%.
A reduction in the average contribution rate had been viewed by many as an inevitable side-effect of the government’s “auto-enrolment” regime, which is currently being rolled out and requires all employers to put eligible workers into a pension scheme.
Under auto-enrolment, in order to ease workers into the new system, the total minimum contribution into their workplace pension has started at just 2% of earnings before rising to 5% in October 2017 and then 8% in October 2018.
The ONS said an increase in the number of new members starting on the minimum rates would clearly pull down the average figure, but the scale of the reduction – a 48% fall in 12 months – is likely to alarm some observers.
The ONS said: “The fall in employer contributions may also be due to employers reducing contributions into existing pensions, referred to as ‘levelling down’.”
The ONS acknowledgement that a levelling down of existing schemes may be taking place is significant, because during the runup to the introduction of auto-enrolment, there were warnings from many experts that companies might decide to offset the costs of enrolling new staff by cutting their contributions into existing workers’ pensions.
As far back as 2010, the National Association of Pension Funds was warning there was “a risk … that many employers level down their provision to the minimum to contain their pension costs as membership increases”.
That same year, Iain Duncan Smith, the work and pensions secretary, was quoted as saying: “If some [employers] level down, they will only confirm negative perceptions of pensions.”
Tom McPhail, head of pensions research and investment firm Hargreaves Lansdown, said the fall in average contributions “looks worrying,” but added that membership of private-sector defined contribution workplace pension schemes had shot up from 1.2 million to 3.2 million over the period.
“The vast majority of these new members will have been enrolled at the minimum statutory contribution rate of 2% of earnings. This means the decline in the average is probably attributable to the diluting effect of these new members, rather than a cutting of contributions for existing scheme members,” McPhail said.
“Nevertheless, it is vital that contributions increase above the 8% minimum they will reach in 2018. For comparison, the average contribution to defined benefit schemes is 20.9%.”
Meanwhile, the ONS said the contribution rate figures “are estimates which should be interpreted with caution.”