Proposed rules governing the U.K.'s new retirement plan for uncovered workers could drive some employers to lower contributions to their existing defined contribution plans, experts said.
U.K. officials earlier this month clarified proposed retirement plan reforms, including new rules on minimum contributions and automatic enrollment, that will create the National Employment Savings Trust, or NEST, a new nationwide retirement plan for workers currently not covered by an employer-provided plan. The rules also applied to employer-provided plans.
At issue is how contributions are calculated. The new rules would require employers to include variable pay, such as overtime and bonuses, in minimum contribution calculations. Experts say most employers base contribution calculations on basic salary alone.
To avoid having their benefits costs escalate from using a broader measure of compensation, some employers might reduce their benefit formula.
Also, the proposed rules would create an administrative nightmare for employers because they would have to determine whether each employee's compensation met new minimum contribution requirements. As a result, employers might abandon their existing benefit formulas in favor of the government-sanctioned approach or drop them entirely in favor of NEST. Either approach could result in lower contributions for most employees.
Some experts say that what is needed is a plan certification process that would approve an entire existing plan as meeting new government standards. Certification would obviate a complicated and time-consuming look at individual contributions.
“We are keen to make progress on that (issue),” said Richard Wilson, senior policy adviser at the National Association of Pension Funds, London. “What we are concerned about is that this will be a type of leveling down,” or reducing benefits for most participants, he said.