From the TUC

First they come for public sector pensions …

28 Nov 2011, by in Pensions & Investment

Government supporters continuously argue that any cut to public sector pensions can be justified as things are worse in the private sector.

But to make pension provision in the public sector look like those in the private sector we would need to expel two in three public sector workers from their scheme, as well as giving top public servants much bigger pensions.

But at least something was being done about the appalling state of private sector pensions with the introduction of pensions auto-enrolment next year, which compels employers to contribute to a pension unless the worker opts out.

But there are now reliable reports, particularly this one in yesterday’s Sunday Telegraph, that the Chancellor will either delay or abandon auto-enrolment for small businesses in the Autumn Statement on Tuesday.

(Incidentally this looks like a classic case of leaking a technical story to a journalist that is not an expert in the subject as the report is littered with small errors.)

The switch to CPI indexation for public sector pensions and some benefits is already hitting private sector pensioners too, as many company schemes are now following the government and downgrading the inflation indexing of their pensions. This new proposal represents a direct attack on private sector pensions.

Private sector workers have every right to feel hard done by in comparison to their private sector colleagues when it comes to pensions, but if any were under the illusion that their pension prospects would improve with cuts to public sector pensions, they are going to be disappointed.

Ending auto-enrolment for millions of workers in small businesses would be the end of the pensions consensus established after Lord Turner’s Pensions Commission report. The wide agreement on the basis of a somewhat better state pension, topped up by a workplace pension secured by the nudge technique of auto-enrolment would collapse. Excluding a significant proportion of the workforce would mean that we no longer had a new pensions system.

It also provides a perverse incentive for businesses to remain small. The marginal cost of providing a pension for an extra worker for an employer is three per cent of their salary between about £5,035 and £33,400 (though these figures will be uprated by the time it starts). But the marginal pension cost of taking on an 11th worker (if employers with 10 or fewer staff are excluded) will be the employer contributions on all 11 staff.

No doubt there will be a boon on avoidance schemes such as splitting companies up into small units too.

Staging for employers with fewer than 250 staff  is due to start in March 2014 with the last starting in 2016. That is already a very leisurely timetable, with some people waiting a further five years before they can start to build up a pension.

My best guess is that the policy will be a delay beyond the next election for this final wave of companies in the auto-enrolment, as excluding a million employers from the scheme altogether would be a breach of the coalition agreement. I can’t see Steve Webb being very happy with that – although there is evidence that BIS, where Vince Cable and Ed Davey both have ministerial posts, has been at best an advocate of delay, and at worst an opponent.

But there must be a strong possibility that the Conservatives will go into the next election promising a permanent exception for small business staff from auto-enrolment.