National Minimum Wage

Implications of Other Government Legislation
Pension Reforms
Chapter 5: Setting the Rate
5.56 Our remit for this report asked us, when making recommendations on the minimum wage,
to take into account pension reforms. These reforms commence in October 2012 and from
this date, eligible workers will be automatically enrolled by their employers into a qualifying
pension scheme. Eligible workers are defined as those who earn more than £7,475 a year
(in 2010/11 earnings terms) and who are aged 22 years old and above but under State
Pension Age.
5.57 The reforms are being staged, with workers in large firms joining first from October 2012,
and all other eligible workers joining later. The contribution rates of employers and employees
are to be phased in, and when complete, a total minimum contribution of 8 per cent per
employee will be paid. That contribution would be made up of 3 per cent from the employer,
4 per cent from the employee and 1 per cent in tax relief. In November 2011, the
Government announced that small firms (those employing fewer than 50 employees)
would not begin automatically enrolling their staff until June 2015, instead of April 2014
as previously planned. The new timetable issued in January 2012 confirmed that small
firms would join between June 2015 and April 2017. It also stated that the full minimum
contribution (8 per cent) would apply from October 2018 and not October 2017, as
originally planned.
5.58 In response to our consultation, a number of employer organisations raised concerns over the
additional costs for employers as a result of the pension reforms. The FSB told us that the
additional costs, both administrative and financial, would add significantly to the burdens
businesses faced. The Forum of Private Business said that some businesses would
undoubtedly choose to provide pension payments rather than an increase in salary to staff.
However, businesses paying the NMW did not have the luxury of this decision: they would
face both an increase in the NMW and obligations under auto-enrolment.
5.59 The ACS, in commenting on the impact, said that this would vary greatly depending on the
size of the business. It said that it was likely that the smallest retailers would avoid paying
pension contributions by restructuring staffing hours to employ more part-time staff earning
under the minimum earnings threshold. This is something we heard from a number of
organisations. A worker paid the NMW would only reach the qualifying earnings threshold if
they worked in excess of 23 hours a week. We also heard from employer representatives
that some of their small business members had omitted to factor additional pension
obligations into their cost assumptions in bidding for long-term contracts. Our sense from the
evidence we have received is that in some quarters there is overstatement of the impact of
the reforms while in others it is under-recognised. We understand that the Government’s
communication campaigns are currently aimed at firms who will be joining first, but we
believe it is important that all firms are made aware of the changes, even if the impact on
many is a few years away.
143