Latest BeeHive Poll – Levelling Down
You’ll remember that in the latest BeeHive poll we asked whether our readers think that employers will reduce their contributions to existing schemes or even close them once Personal Accounts are introduced in 2012.
To many of those who responded that seems a ‘no-brainer’, but the poll did reveal a certain level of optimism that advisers themselves could be key to stopping the dumbing-down of our pension system.
The headline results of the poll are that 87% of respondents think that the introduction of Personal Accounts will lead to a levelling-down of contributions and even the closure of existing schemes, but a significant minority of 13% disagree. As usual, though, it is the reasoned arguments and comments you made in support of the headline yes/no answers that tell us more about what is likely to happen in the real world. Thanks again to those of you who contributed and for your insights into what is happening at the pensions coal-face. I’ve included here a number of representative comments, first from those who disagree and then from those who voted ‘yes’ to the question.
A selection of those who disagreed as follows:
Depends on their balance sheets at the time and what their advisers say!
I don’t think so - not across the board at least. Some will I guess. Logically, why cut a valued employee benefit if you introduced it previously without compulsion?
Depends on the labour market and whether providers do a better job of marketing their schemes.
From speaking to large companies they are unlikely to level down as many actively encourage greater pension take up at the current higher employer contribution rate. However, I am sure that many small companies will level down, because they can. After all, for many smaller companies, money saving is the key driver.
Most of my employer clients have, within their budgets, made a conscious decision to support their staff’s retirement plans. Therefore ‘getting away with less’ is not on their agenda.
Compare Personal Accounts to the Minimum Wage. Did employers reduce wages when that was introduced. Effective representation from employees will ensure employer contributions are not reduced.
Perhaps surprisingly, most of our clients offer non-contributory benefits, so these won’t change. Those that don’t are still likely to maintain the status quo, I think because otherwise employee dissatisfaction will be too great.
And a selection from the majority who are convinced that the pension reforms will lead to levelling-down:
Large and paternalistic employers will probably maintain their contribution levels. There must however be a temptation for smaller employers to see 3% as an adequate government-endorsed figure.
The correct answer is probably that some will and some won’t. A lot will depend upon how the unions react in industries where they are strong and still have a big influence. In industries where union membership is low, with lots of part-time working (such as retailing) employers are likely to look to level-down to save costs. Civil Service and Local Authority schemes are likely to remain largely untouched.
I believe that since it is a Government introduced scheme, the 3% contribution level will become ‘the going rate’. Most employers will look to keep costs down and if they have been paying higher than that, they may feel that they have been over-paying. Some people may even believe that as this level has been chosen by the ‘powers that be’, it will be sufficient to build a decent income in retirement.
For many employers it will be a natural commercial decision to reduce contributions – and one which is particularly likely to affect those at the lower end of the pay scale.
I am already recommending to companies setting up a pension scheme that they should contribute at 3% of banded earnings. These are employers who would have been happy to pay perhaps 6% of all earnings for those employees who would also contribute. So levelling down has already happened.
5 out of 5 Company Clients have already confirmed their answer to the following question which it doesn’t take an Einstein to anticipate. ‘If you have to choose between paying 8% of the salary bill for 250 employees, or 3% of the salary bill for 350 employees, which will you go for?’ Out come the calculators, and Bingo! There’s your answer!
I think that SME’s are the most likely candidates to do this. Smaller firms obviously find it harder to compete and any savings that can be made in outgoings can have an effect on their competitive position. This works the other way as well in that an increase in payroll costs could have a detrimental effect. Levelling down is a clear route to reducing the problem and I suspect that many accountants will be looking at this as a means of cost control. The other very likely option is that employers will begin (if they haven’t already) to factor in the costs of PA’s to annual pay awards. This means that rather than an employer/employee partnership, the employee is effectively bearing all of the cost (tax relief apart).
There will always be a central core of employers that for any number of reasons are willing to pay for quality pension arrangements but a great many of them will see this as an opportunity to reduce their expenditure. I suspect that if they are being forced to broaden the membership of their schemes even more employers will be forced to look for ways to control their costs by reducing contribution rates.
The problem is not with the employers who are using a good pension contribution to motivate and retain their staff. It is the next level down, where cost-cutting employers are gagging for an excuse to reduce benefits wherever possible. There are still lots of these, and still paying more than 3% (almost no-one pays less!) of ALL salary (not just band earnings).
And there are plenty more responses like these, but too many to include here. Like all pension issues this one looks a lot more complicated up close than when viewed on the horizon. It’s clearly not a black-and-white issue and whether or not levelling-down happens as a result of these reforms may depend, at least in part, on how employers and their advisers react to events. In a strange way that sort of leaves me feeling more optimistic than pessimistic, but on the other hand it may be that the effects of the Christmas break haven’t completely worn away yet. Who knows?
11 January 2008
Results shown are based on 156 responses to BeeHive poll received from 23 November 2007 to 9 January 2008. Actual results have been rounded to whole numbers.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.