UK – Sponsors should not be allowed to unilaterally amend defined benefit (DB) accrual rates as they seek to recoup the cost caused by the end of contracting out, the UK’s union umbrella group has said.

Discussing the proposed reform to the state pension – which would see the introduction of a single-tier system and the end of the state second pension, as well as contracting-out – Craig Berry, pensions policy officer at the TUC, noted that the changes would not be fiscally neutral, despite government claims to the contrary.

Giving evidence to the parliamentary select committee for work & pensions, Berry said the increased national insurance (NI) contributions required by the end of contracting out would lead to public sector employers paying an additional £3.5bn (€4bn) in contributions – a cost that could not be offset by changes to the public sector pension funds’ accrual rates.

Asked about the Department for Work & Pensions’ (DWP) proposed override for private sector DB funds, Berry dismissed it as “unnecessary”.

He said the perceived necessity for an override, allowing private sector sponsors to lower accrual rates in line with their increased NI contributions, was a misrepresentation of the work done by trade unions on behalf of members, as unions would often support measures aimed at safeguarding “the wider financial viability” of pension funds.

“I don’t think it’s entirely necessary to give the employers unilateral power to make scheme changes – they should be negotiated at scheme level,” he said.

“There is no evidence that trustees or members would be entirely averse to making those scheme changes if they recognise the state pension outcomes will be higher.”

The issue of a better outcome after the end of contracting out was an important one for Berry, who said the proposed override would be on an aggregate level across individual funds, allowing sponsors to calculate the total cost imposed by the new NI contributions.

He said the approach would not guarantee individual members would in fact be better off after being contracted back into the state pension system.

“Making these calculations at the aggregate level per scheme is the difficulty here,” he added, “and we’d like to see a guarantee that no members will suffer meaningful losses as a result of this unilateral power being employed – if it is employed.”

Meanwhile, a survey by Aviva has shown that more than one-third of employees currently not saving into a pension fund would not see this change through auto-enrolment – with affordability of contributions cited as a reason for opting out.

The insurer’s second annual Working Lives survey found that 37% of workers not saving into a pension would opt out, while 36% would remain in a fund upon being automatically enrolled.

The survey added: “Employers have mixed views on potential opt-out rates, with 38% undecided on the percentage of their employees likely to opt out and 10% saying no one will opt out.”

The chief executive of the National Employment savings Trust (NEST), Tim Jones, said there was “no doubt” that concerns surrounding affordability of contributions played on workers’ minds.

However, he seemingly cautioned against viewing one set of figures as more authoritative than other research on opt-outs conducted.

“While surveys among different groups of consumers will no doubt provide a range of results, it will be interesting to see how opt out works in reality as more people are enrolled over the next few years,” he said.

He also referred to anecdotal evidence from larger employers that opt-out rates were running around 10%.  

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