Any introduction of compulsory employer contributions to pensions would be cushioned, John Hutton said on Friday. The promise by the work and pensions secretary came as small businesses warned him that they would be unsustainable.
Mr Hutton told the Federation of Small Businesses that the government backed the idea, recommended by the Pensions Commission, of a new national pension savings scheme into which employees would automatically be enrolled. However, it had yet to make up its mind on whether employers should then be compelled to put in 3 per cent of salary when an employee decided to stay in the scheme.
Philip Hammond, the Conservative pension spokesman, told the Financial Times earlier this week that his party would support employer compulsion on certain conditions.
Mr Hutton, however, said the decision remained “very finely balanced”. He added: “So let me make one thing clear: should we go down this road, we will have to look seriously at how these burdens can be minimised, and minimised in particular for small businesses.”
If the government does go ahead, it is unlikely that small employers will be exempted as it is precisely from among their ranks that people are not saving anything at all for old age.
However, the pensions department is understood to be examining a number of options to help small businesses. These include phasing in the payments, tax breaks or a sliding-scale payment where the state meets the extra cost in full for the first employee or employees and then, fairly rapidly, winds down its contribution per employee.
That last idea has been advocated by Lord Turner, chairman of the Pensions Commission. It would protect the very smallest employers without creating a “cliff edge” where an extra employee suddenly meant a bigger pension contribution for all employees.
Despite the Tories’ apparent assurance that they would not attack compulsory employer contributions as a new tax, ministers’ concerns about the impact on business appear real and not just rhetorical.
Aside from the difficulties for very small companies, which ministers see as the engine for innovation, they are acutely aware that even where big employers have decent money purchase pension schemes, often, only 30 to 40 per cent of employees join them.
Auto-enrolment would see those numbers jump, adding to employment costs. That in turn has led to concerns that employers with more generous contributions than 3 per cent – 6 or 7 is typical – might scale those back to offset the cost of having to contribute a minimum 3 per cent for everyone.