Blog: Perfect pensions’ storm arising from auto enrolment rules could blow UK economy way off-course
Mark Mulholland, a partner at Chartered Accountants and business advisers Alexander Sloan’s Glasgow office, contemplates the repercussions of auto enrolment in uncertain times.
Economists specialise in forecasting; this time though, writing as a practicing accountant rather than an economist, I fear I have to forecast that, potentially, we have the makings of a perfect pensions’ storm on the issue of auto-enrolment.
This is the legal obligation, brought in a couple of years ago, that all companies with one or more employees are obliged to put employee pensions in place and then contribute to them.
At present the auto enrolment regime requires a contribution of 1 per cent of qualifying earnings from both the employer and the employee.
This is against a background where UK inflation was 2.6 per cent in June and UK whole economy wage growth, according to the Bank of England, was 2.3 per cent in May. In other words, employees are continuing to experience reductions in spending power.
On 6 April 2018 a phasing arrangement in the auto enrolment legislation will ensure that the percentage contribution will rise to 3 per cent from employees and 2 per cent from employers, with a further increase in April 2019 to 5 per cent from employees and 3 per cent from employers.
My question is: how will a 200 per cent increase in employee pension contributions and a 100 per cent increase in employer contributions impact on the SME sector in particular and on the overall UK economy in general?
Even a cursory, back of an envelope, calculation suggests that the auto enrolment rules will take out tens of millions of pounds of direct consumer spending power from the British economy as well as dealing a severe blow to the often precarious cash flows of tens of thousands of small businesses.
The auto enrolment rules pose no real threat to bigger companies or the public sector where pension arrangements are already in place, generously so in the case of the latter, but the impact on SMEs, which comprises the vast majority of UK employers, could be serious.
For smaller organisations, and charities, where funding is under constant pressure, projecting costs forward is now more critical than ever to ensure payroll costs can be covered.
The overall UK economy, too, will suffer; sharply reduced spending power, not to mention a reduction in the tax take – since pension contributions are tax-deductible – and this could be an insoluble problem for the Treasury.
At present, the auto enrolment ship sails on: is there a political or economic will to redraw the compass?