Halting companies’ mandatory pension contributions could form part of government remedies to support businesses during the Covid-19 pandemic, pension specialists have argued, since protecting jobs is as important as saving for retirement.
Chancellor of the exchequer Rishi Sunak has warned that he would do “whatever it takes” to support the economy through the current crisis.
He announced on Tuesday a £330bn war chest of loans to protect businesses against the financial difficulties caused by the coronavirus outbreak.
He said: “The coronavirus pandemic is a public health emergency, but also an economic emergency. We will support jobs, businesses, incomes and help you protect your loved ones — whatever it takes.”
A three to six-month hiatus wouldn’t be too problematic in the grand scheme of things, but allowing it to drag on for much longer would risk doing huge damage to people’s future pension pots
Nathan Long, Hargreaves Lansdown
Mr Sunak said he was taking a new legal power through the coronavirus bill to “offer whatever further financial support” was necessary.
Prime Minister Boris Johnson reiterated the message, saying the government needs to “act like wartime government and “do whatever it takes to support the economy”.
Before the announcement, Nathan Long, senior analyst at Hargreaves Lansdown, questioned if halting companies’ auto-enrolment contributions could be part of the remedies to be introduced by the chancellor.
Introduced in late 2012, auto-enrolment has been a flagship pensions policy for the government. To date, more than 10m employees have been enrolled into a workplace pension.
The minimum pension contributions increased in April 2018 to 8 per cent from 5 per cent, with companies paying 3 per cent.
Even though such a measure was not announced on Tuesday, it could be part of a package of additional measures, Mr Long noted.
“Just halting the pension contributions for a short time won’t free up sufficient capital to protect businesses, especially when you think for most small businesses it will only be the minimum payments of 3 per cent of qualifying earnings.
“However, the chancellor couldn’t have been clearer that they will stop at nothing to ward off the economic side-effects of coronavirus.”
Three to six-month hiatus is feasible
Mr Long noted that saving for retirement is critical to the future financial health of the country, but so is “ensuring job losses are minimised so people can keep a roof over their head and food on the table”.
“I suspect concerns for businesses would have to escalate significantly from here to warrant the temporary suspension of pension contributions.
“If it happened, a three to six-month hiatus wouldn’t be too problematic in the grand scheme of things, but allowing it to drag on for much longer would risk doing huge damage to people’s future pension pots.”
Kate Smith, head of pensions at Aegon, would not support halting companies’ auto-enrolment contributions.
She noted: “The consistent message coming from the government is the importance of timing, and at this stage pressing the pause button on employer pension contributions doesn’t feel the right time.”
For Steve Webb, former pensions minister and partner at LCP, the slump in demand facing some firms is so great that suspending auto-enrolment payments “would make very little difference”.
Nevertheless, Sir Steve noted that rules around mandatory pension contributions could come under the spotlight “as we move from the crisis phase to a longer-term ‘recovery’ phase”, and the government reviews all costs on businesses.
Law would need to be changed
If the government decides to halt pension contributions, a change in law would be needed, argued Stephen Scholefield, partner at Pinsent Masons.
He also noted that it would not be a straightforward process, as some employers may still be able to afford a pension contribution.
“Others may be contractually obliged to pay one anyway, so a simple change to auto-enrolment wouldn’t automatically help those employers,” he said.
Mr Scholefield added that implementing such a measure could be a challenge.
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“It would be difficult to decide when a break should begin and, more importantly, end. Different sectors and employers will be affected in different ways, some of which may continue long into the future.”
Nevertheless, he would support such decision from government.
He said: “Given that many employees are probably more urgently in need of pay today than a pension contribution, it would seem unduly dogmatic not to allow a pension contribution to be treated in the same way as other earnings.
“If that requires a temporary suspension to the auto-enrolment laws, then it is a price worthy paying.”
