Auto-enrolment could be affecting employers’ ability to award pay rises as they set out their reward budgets for the year ahead.
Although the economy continues to improve, pay increases look likely to remain low.
In many organisations, funds that may previously have been earmarked for pay rises are being swallowed up to fund pension contributions post-auto-enrolment.
Roger Sanders, managing director of Lighthouse Group Employee Benefits, said: “Money going into auto-enrolment, either 1% of band earnings or 2% of basic pay, is impacting employers’ ability to give staff a meaningful pay rise or any at all.”
Research by engineering and manufacturing employers’ association EEF, published in August, found that pay in the manufacturing industry rose by 2.6% in the six months from February to July, up from 2.4% in the same period in 2013.
Meanwhile, according to the Chartered Institute of Personnel and Development’s (CIPD) latest Labour market outlook survey, also published in August, 42% of respondents expect their organisation to increase basic pay.
However, the Office for National Statistics’ UK Labour market, August 2014 report found that pay, including bonuses, for UK employees was 0.2% lower than it was a year ago.
Sanders added: “Essentially, employees are getting a pay rise by employers putting money into their pension schemes, but employees will not see it until they retire.”
However, from April 2017, as pension contributions increase, employers will need to budget for the increases, as well as factoring in the other costs of running a pension scheme, which means pay rises are likely to remain low.
Elliott Silk, head of employee benefits at Sanlam Wealth Planning, said: “[Auto-enrolment] is certainly being factored in. Normally what we would see is employers allocating a 3% pay review amount, but as employers realise they have to pay higher pension contributions, they are only looking to set aside 2% of their budget for a pay increase and the other 1% for pension costs.”
But there is some good news on pensions. Scottish Widows’ Annual workplace pensions report, published in September, found that half of UK employees on lower incomes are saving enough for retirement, compared with 34% in 2012.
Deborah Hargreaves, director at the High Pay Centre, said: “I think auto-enrolment is going somewhere to redress the issue of employees not getting a pay rise over the last few years, especially the more generous schemes, because they are getting back some of the benefits they will have lost to no pay rises.”