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U.K. plan for mandatory pensions sparks concerns over cutbacks

U.K. plan for mandatory pensions sparks concerns over cutbacks

LONDON—The U.K. government is forging ahead with a plan to create a mandatory low-cost pension plan despite concerns that the reforms may prompt companies with more generous plans to reduce their contributions to the government's minimum.

The pension reform white paper published last week by the Department for Work and Pensions formalizes proposals put forward earlier this year to establish low-cost pension plans, into which every employee would be automatically enrolled unless he or she is a member of a more generous employer-sponsored plan (BI, May. 29).

Under the proposal, workers between 22 years old and the pension eligibility age, now 65, would be enrolled if they earn more than £5,000 ($9,798) starting in 2012. They would contribute 4% of earnings up to £33,500 ($65,442) a year, matched by a 3% contribution from employers and 1% in the form of tax relief. The combined 8% contribution is an amount that the government estimates would yield 45% of working income during retirement.

The earnings band would be indexed to inflation.

The government estimates enrollment of between 6 million and 10 million in the new plans, with £8 billion ($15.63 billion) a year in total contributions. About 60% of that would represent new contributions.

The plans would be administered by a pension authority overseen by experts from the financial services industry. Plan participants would be able to select a pension fund, and those who do not would be assigned to a default fund.

The broad points of the bill gained the support of labor and employers.

If properly implemented, the proposals would boost pension participation rates for millions of people currently not saving for retirement, said John Cridland, deputy director-general of the Confederation of British Industry, in a statement. "But without a package of support measures, employers with existing (plans) might be tempted to cut their contributions to contain the extra expense; and firms without (plans) will see growth and employment affected."

The National Assn. of Pension Funds warned that creation of the low-cost pension plans might prompt employers offering more generous plans to reduce their costs by opting for the new plans.

The association is advocating that the government introduce financial incentives for employers to maintain their current commitments.

"Politically, that's quite a long shot," said an NAPF spokesman. "NAPF recognizes the government has a number of financial restraints."

Ultimately, the new plans' cost likely would be passed on to workers, said Paul McGlone, principal with Aon Consulting in London.

"This will have to be paid for somehow. Ultimately, it will affect take-home pay. Employers will pass costs along," Mr. McGlone said.

Brendan Barber, general secretary for the London-based Trades Union Congress, said in a statement that he "warmly welcomed" the proposals.

In proposing the National Pensions Savings Scheme, in which a centralized administrator would serve as the interface between the contributors and the investment community, the government rejected an approach supported by the pension industry in which existing pension providers would compete for workers' business.

The TUC's Mr. Barber described that proposal as a "battle of the brands that could only confuse savers and raise costs."