News update – Pensions scheme will raise employer costs

Plans for a new low-cost savings scheme outlined in last month’s White Paper on pension reform could increase costs for employers by more than £2.3bn. The new personal accounts scheme, which will be introduced in 2012, was proposed by Turner in his Pensions Commission report last year, where it was called the National Pensions Savings Scheme.

It will require employers to provide minimum pension contributions for staff. Employers will pay 3% of annual employee earnings calculated on incomes between £5,035 and £33,540 a year, for all staff over 22 years. The scheme will be compulsory for employers unless they offer an occupational scheme that is as generous as the personal accounts. In these cases, they may opt employees out of the personal accounts but must introduce auto-enrolment to the occupational scheme. Employees will have to contribute 4% of annual earnings, with a further 1% added in the form of tax relief, setting a minimum overall contribution level of 8%.

These contributions will be phased in over a three-year transitional period for both employers and employees. Adrian Boulding, pensions strategy director at provider Legal and General, said the reforms are likely to generate higher pension savings but will also mean employers could face higher costs. "Employers [without auto-enrolment] get about 50% of the staff joining the pension scheme.

With automatic enrolment you tend to get about 90%. [This] could double pension costs." Graham Brown, pensions manager of the charity Barnardo’s, however, backed the reforms. Barnardo’s offers a final salary pension and already auto-enrols members, so is unlikely to be required to run a personal accounts scheme. But Brown expects the proposal to appeal to some staff, especially graduates with debts. "Their priority is to get rid of the debt before they worry about their future.

Rather than pay [final salary contributions of] 6% they would only have to pay 4%." The state retirement age will also be increased to 68 years by 2050.