One in six UK businesses could face insolvency if the government raises employer auto-enrolment pension contributions, according to research from Barnett Waddingham.
Such a move could also lead to further disruption in the labour market. According to the survey, two-fifths of employers said they would look to reduce headcount, while a third would freeze recruitment in response to higher contribution requirements.
Barnett Waddingham says these findings underscore the potential economic shock that further pension-related costs could deliver to businesses already grappling with rising expenses, including the increase in employer NI contributions, introduced at the last Budget. However the consultancy firms adds that there is a growing problem with retirement adequacy across the UK.
The research comes as the Department for Work and Pensions (DWP) continues its review of the UK’s auto-enrolment framework, amid growing speculation that a mandated increase in contribution levels could feature in the next Budget.
Barnett Waddingham warned that the results highlight a “worrying level of financial fragility” among employers, many of whom are still adjusting to higher National Insurance costs introduced in the last fiscal year. Over a third (36 per cent) of respondents said they would likely scale back or remove employee benefits if contributions rose, potentially undermining retention and exacerbating pressures in an already constrained labour market.
Only 17 per cent of the businesses surveyed said they could absorb a contribution increase with minimal disruption.
Martin Willis, partner at Barnett Waddingham, says: “With pension adequacy a growing concern and millions of people at risk of falling short of even a minimum income in retirement, addressing the ticking timebomb of the UK’s pension system must be a top priority for government. The current 8 per cent minimum contribution simply isn’t enough to ensure a comfortable retirement.
“However, as our findings show, even modest increases could have unintended consequences — disrupting business operations, stalling recruitment and, in extreme cases, threatening livelihoods. Many firms remain on a financial knife-edge, already stretched by National Insurance hikes and persistent wage inflation.
“As the Pension Commission embarks on its work to tackle the UK’s long-term retirement challenges, the government must take a balanced approach — one that improves retirement outcomes without undermining the resilience and continuity of UK businesses.”