Employers poised to slash staff pensions – again

Businesses could be tempted to cut their contributions next year when the Government's low-cost scheme is brought in

Millions of workers could find the amount of money paid into their pensions by their employers slashed once the Government introduces the Nest scheme in October 2012.

The growing fear among pension experts is that the advent of Nest will lead to some big employers killing off their lucrative company pension schemes in favour of the new low-cost government one. As a result, employees could find that the amount of money being paid by their employers falls from an average of about 8 per cent to the meagre minimum level under the Nest scheme of 3 per cent. This would leave millions of workers far poorer in retirement.

"In the current economic environment, the prospect of firms levelling down their contributions to the new Nest minimum is deeply worrying," said Alasdair Buchanan from provider Royal London. "Costs for employers of providing pensions are rising, and at what point do they say enough? If they see a competitor getting away with paying 3 per cent of salary into Nest, why should they pay more? There are some good pension schemes out there where employers pay in 10 per cent or more and these schemes could be at risk."

There is history when it comes to employers slashing workers' pension provision. In the past decade, the overwhelming majority of private-sector, final-salary pensions were closed and new, defined-contribution personal pension schemes opened by employers looking to cut costs. Now a stampede out of group pensions and into the even lower-paying Nest is in the offing.

"We've seen this process before. We are already seeing firms react to the recession by cutting their pension contributions. The introduction of Nest will give them an escape route from their current arrangements," said Ros Altmann, the director-general of Saga. "The problem is that the minimum 3 per cent employer contribution under Nest will become the new norm for much of the economy. It may take only a few big names to switch their workforces to Nest to start the ball rolling. This is a big risk to take with the position of those currently saving hard in their employer pension schemes."

Tim Jones, the chief executive of the body overseeing Nest, says most workers will be better off under the scheme. "There is a lot of talk about levelling down of contributions. But what you have to realise is there are likely to be six million workers who don't have a pension who will have one for the first time, with minimum contributions from their employers because of the introduction of Nest. This is levelling up, not levelling down."

Mr Jones adds that large employers plan to offer their new joiners access to Nest beside their current group personal pensions. "Nest will allow firms to better offer a pension to younger staff that may not be with them long." But in response, critics suggest that this could make it easier for firms to move existing staff from higher-paying group schemes into the lower-paying Nest.

In addition, the Government's decision to go ahead with the controversial policy of automatically enrolling workers into their company pension schemes could accelerate the flight to Nest by making current arrangement more expensive. "Quite a few employers are thinking about the likely costs of auto enrolment and will be looking at the Nest option. What we may end up having is the same amount of employer money going into pensions, but spread among many more people," said John Taylor, the head of corporate pensions at Scottish Widows.

"The main problem with this is that the level of pension contributions planned under Nest is nowhere near enough in order to provide for a comfortable retirement. If this is going to work, we need a lot of education."

The Pensions minister, Steve Webb, disagrees that auto enrolment will lead to employers closing their own schemes and using the poorer Nest option. "Our research shows that 94 per cent of employers would maintain or increase their pension contributions when automatic enrolment begins. These reforms will mean that, from 2012, millions of people who currently have little or nothing put by for their retirement will find themselves enrolled in a workplace pension – setting them on the road to a more secure future."

Meanwhile, last week brought an announcement of a major review into pensions by the former chairman of the Treasury Select Committee, Lord McFall. The review will look at how to get people saving more for their retirement. However, the review has attracted some criticism. Mr Taylor said: "The coalition has confirmed the direction we are going in – particularly with the state pension system. The emphasis now should be about getting there and making a success of the framework, including Nest, rather than waiting around for the results of another review."