Pension benefits threatened by sharp increase in new members

Employers are set to slash pension benefits to staff as a consequence of being forced to enrol millions of new employees into company schemes, a report warns today.

About 41 per cent of larger employers plan to "level down" their pension schemes because of the cost of automatically enrolling staff under new rules designed to ensure that more workers have some form of private pension provision when they retire, according to research from the Association of Consulting Actuaries (ACA).

Levelling down involves reducing future benefits in both existing and new schemes, to meet the extra costs of the new staff who will have to join the scheme.

The moves come at a time when many firms have axed the most generous type of pension scheme – those guaranteeing staff a percentage of their final salary when they retire. Most private-sector workers have been left with only "money purchase" pension plans, whose benefits are largely dependent on investment returns.

While many firms contribute to such schemes, the fact they are planning to downgrade benefits will heighten fears of a "pensions timebomb" of people with only limited provision when they finish working.

The ACA is using the data as part of its input into the Government's review of auto-enrolment into company pension schemes. The survey, covering 210 large public- and private-sector employers with pension scheme assets of £168bn, found that many employers – while still generally supportive of automatically enrolling staff – found the new regime complex.

Businesses also felt they should not be forced to keep track of and "re-enrol" staff who voluntarily opt out of pensions every three years.

Some three-quarters of respondents feel that staff with less than three months of service should not be auto-enrolled, as is required under the new rules, while 60 per cent feel employers with fewer than five staff should be exempted altogether.

"Whilst the full cost of auto-enrolling all eligible employees will not hit most organisations until 2017, it is only right that the costs of auto-enrolment, including the administrative challenges, are addressed and tested as soon as possible," said the ACA chairman, Stuart Southall. "Larger employers must act in the run-up to 2012. That is why we have welcomed the review commissioned by the Coalition Government and have separately made our own recommendations as to how the overall policy can be simplified and improved."

A separate survey, into what smaller firms plan to do, is still under way.