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Pensions scheme could lead to salary cuts – IoD

Auto-enrolment in the Government’s pension scheme could lead to businesses being forced to cut or freeze salaries, the Institute of Directors (IoD) has warned.

A survey of employers found that most – 98% – were aware of the requirement to contribute to employee’s pensions, introduced last October. 62% were also confident that they were prepared for the change.

Only 15% of 1,327 members surveyed expected staff to choose not to enroll in the scheme, although there was greater uncertainty in smaller firms, where 36% did not know what their staff would do.

42% of businesses would have to meet the contributions out of their profits, with 21% stating they will have to freeze or cut salaries to contribute.

Malcolm Small, senior pensions policy adviser at the IoD, said: “Auto-enrolment is a new challenge for business, both in terms of costs and logistics. It’s positive that nearly all businesses know that they will have to set up a pension scheme for staff over the next few years, and that most feel ready for it. However, we still don’t know how small firms are going to handle the burden – nearly half still feel unsure about the process, and many don’t know if their staff are going to drop out.

“While pensions are still the dominant method of saving, our members are increasingly looking elsewhere to provide for their retirement. The rigidity of pensions and poor annuity rates have created resentment among many, who are choosing to supplement their income with more flexible forms such as ISAs. Tax relief is still an advantage, but very few believe the pensions system is currently fit for purpose. These figures make the case for radical simplification.” 

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