Liz Kendall’s proposal to increase employer contributions to workplace pensions risks triggering a wave of unemployment, a leading industry expert has warned.
Paul Cuff, co-head of XPS Pensions, the UK’s largest independent pension consultancy cautioned that accelerating changes to minimum employer contributions could place further strain on businesses already facing rising costs, potentially leading to job losses in an already fragile labour market.
“Raising minimum levels of required contributions is another cost burden for employers that are under a lot of pressure, especially following moves like the recent National Insurance increase,” Cuff said.
“It could actually have quite negative effects on the economy if it puts more financial pressure on companies and reduces their ability to invest or hire. It could be counterproductive.”
Cuff added it was quite possible the move could lead to increased unemployment, highlighting the difficult balancing act facing both government and employers.
The warning follows the launch of a new pensions commission by Work and Pensions Minister Liz Kendall, aimed at tackling what she described as a looming crisis in retirement incomes. She said “tomorrow’s retirees are on track to be poorer than today’s.”
Currently, employers are required to contribute at least 3% of a worker’s salary into auto-enrolled pensions, with employees contributing a minimum of 5% a total of 8%. However, experts argue that the combined contribution should be closer to the mid-teens (around 15%) to ensure a secure retirement.
“If we don’t start increasing contributions, we’re just kicking the can down the road for another 20 years. But eventually, it will come back to haunt us,” Cuff said.
The government has previously warned that nearly half of working-age adults are still not saving anything for retirement. While auto-enrolment has significantly improved participation with 88% of eligible workers now saving, up from 55% in 2012 contribution rates remain too low to meet future needs.
Labour’s pension plans come as the UK job market shows signs of stress. Chancellor Rachel Reeves’ recent £25bn tax package for businesses, alongside another significant minimum wage hike, has been blamed by critics for slowing hiring. Unemployment is currently at 4.7%, the highest rate in four years, and the number of new hires has been falling for three consecutive years the longest sustained decline in over two decades.
Cuff urged the government to introduce any pension contribution increases slowly, over a number of years, to allow businesses to adapt.
Meanwhile, speculation is mounting that the Chancellor may introduce National Insurance contributions for working pensioners in the upcoming autumn Budget, as the Treasury looks to address a £50bn fiscal gap.
At present, individuals working beyond the state pension age of 66 are exempt from National Insurance. Scrapping this exemption could raise around £1.1bn annually by the end of the decade, according to the Institute for Fiscal Studies.
Former pensions minister Steve Webb said the change might be politically feasible:
“Because it affects people over pension age, you could argue it doesn’t break the manifesto pledge it’s not working families, it’s pensioners who happen to still be working.”
Former prime minister Gordon Brown has also floated the idea as a potential revenue source. However, Baroness Ros Altmann warned that such a move could discourage older workers from remaining in the labour market.
“What we need and want is to encourage more older people to keep working,” she said.
Chancellor Rachel Reeves has committed not to raise income tax, VAT, or employee National Insurance contributions.
A government spokesperson responded to the concerns, saying:
“The Secretary of State has made clear that there will be no change to minimum auto-enrolment contribution rates during this Parliament.
We’re reforming the pensions market to drive economic growth, ensure greater security in retirement, and put more money in people’s pockets as part of our Plan for Change.
This comes alongside our biggest reforms to employment support in a generation, with the goal of achieving an 80% employment rate.”
