The ending of contracting-out will have consequences on the pensions industry, and these should not be under-estimated, Aon Hewitt has warned.

Although contracting-out will end in 2016, an Aon Hewitt survey of 91 organisations has revealed that a third have already considered how they might respond to the ending of contracting-out.

Out of those who have thought about their response, over half are considering closing their defined benefit (DB) scheme to future accrual, among other options.

"We expect many of these closures will occur well ahead of April 2016 as finance directors are faced with difficult results from 2013 and, potentially, 2014 valuations," said James Patten, Aon Hewitt head of benefit design.

Patten added that the ending of contracting-out will have a "considerable financial impact" as around 2.5% of a DB scheme's membership's payroll will typically be added to an employer's National Insurance Bill.

He said that most employers will be able to offset this cost by slightly reducing the rate of future accrual or by pushing up member contribution rates by around 2.5% of pay.

"However, our survey demonstrates that while many remain undecided, of those employers that have reached a view on the matter, more than half expect to make more substantial changes than this," Patten said.

He added: "We expect many employers to think further about whether current defined contribution (DC) plans are really fit for purpose before they move existing DB members into them.

"Similarly, it remains to be seen whether the Government's defined ambition reforms are implemented and whether they come in time to influence employers' approaches to dealing with the end of contracting-out."

In the 2013 Budget, the Government announced that it will end contracting-out as part of a transition to the single-tier pension.

First published 15.08.2013

monique_simpson@wilmington.co.uk