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Workers face losing hundreds of pounds in wages each year as companies freeze salaries to offset the cost of auto-enrollment pension schemes, Government figures show.The Department for Work and Pensions set up its auto-enrolment scheme this month. The policy obliges companies to enroll all staff into work pensions and is designed to give up to 11 million employees a private pension for the first time.
Estimates from the department suggest that companies will look to save £2.6 billion of the annual cost of the pensions by capping wage rises for their staff.
The estimates are included in an impact assessment that the department carried out in the spring.
According to the impact assessment document, the annual cost of auto-enrolment to firms should be £5.7 billion. However, the department believes that businesses will “offset” this cost by making “labour market adjustments”. This could reduce the final bill for businesses to £3.1 billion a year.
Pensions experts said that “labour market adjustments” meant that companies would freeze salaries, cap pay rises or restructure their workforce.
Barry Parr, the co-chairman of the Association of Member Nominated Trustees, which represents pensions trustees, said that the objectives of auto-enrolment were to be applauded. However, he warned that there was likely to be a negative effect on pay rises.
“The reality is that the money has to come from somewhere. You can’t just magic it. I think those judgments are right. There will be pressure downwards on salary increases.”
Anthony Arter, the head of pensions at the law firm Eversheds, said it was inevitable that companies would look to offset the high costs of giving all their staff pensions. “In the current economic climate it is understandable that employers are looking for ways to offset this additional cost, and freezing salaries or paying lower salary increases is one option.
“Employers are also looking at other options such as implementing salary sacrifice arrangements which can result in significant national insurance savings for them and their employees.”
Although auto-enrolment began this month, it will be years before all companies use the scheme. The Government has staggered its roll-out, starting with the largest firms. Small and medium-sized businesses have until 2018 to start, depending on their size.
Once the scheme is fully up and running, workers will contribute 4 per cent of their salary to their pension, employers will contribute 3 per cent and the Government will add 1 per cent of tax relief.
Research by the pensions department found that while a third of companies planned to absorb the costs of auto-enrolment through their profits, one in five will lower wage rises. A spokesman said it had always been clear that there was a cost associated with auto-enrolment, but said the Government would help businesses minimise the burden.
“We’ve always recognised that a careful balance has to be struck between automatically enrolling those without a pension and minimising the cost to business.
“We are doing everything we can to ease burdens on employers, including bringing the changes in gradually to help them adjust, phasing in contributions and starting with the biggest firms first,” the spokesman said.
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