If struggling workers choose to reduce their pension contributions, a legal loophole could allow employers to stop contributing all together.
Members of workplace pension schemes could potentially miss out on employers’ contributions if they choose to not increase their own contributions following the latest auto-enrolment increase.
Under auto-enrolment rules, as of 6 April the amount of money employees will pay into their workplace pension will increase from 3% of their qualifying salary to 5%.
The amounts that employers will need to pay in will rise too, from 2% to 3%. The increases mean that the total minimum contribution will rise from 5% to 8%.
Although employers are not able to promote an “opt-down” option, where employees reduce their contributions following an increase, Aegon is concerned that more struggling members might start requesting it.
Kate Smith, head of pensions at Aegon, says: “We haven’t seen much evidence of this happening so far, but we are entering a new era now and it could start happening.”
Ms Smith says that if members do ask to maintain payments at the pre-increase level, ungenerous employers could take advantage of a loophole that would allow them to stop paying employer contributions all together.
“Your employer would say that you effectively opted out of the scheme by paying less than the minimum contribution and so they wouldn’t have to pay anything.”
She stresses that this is a worst-case scenario and that some employers would be willing to negotiate.
Nonetheless, if savers are struggling to afford pension payments, it’s a problem they need to be aware of.
“We would be worried employees just look at their contributions. Employer contributions are actually more valuable than tax relief,” Ms Smith adds.
This article was originally written by our sister publication Moneywise.