The end of contracting out is not been taken seriously by UK companies, an attitude which could cost them over £10bn over the next decade, according to actuaries Hymans Robertson.
From April 2016, the new single-tier pension will replace the existing two-part system, which in turn will abolish the contracting out of the second state pension for defined benefit pension schemes.
However, government plans will see the majority of UK companies with DB pension schemes facing an increase in National Insurance (NI) contributions. Costs for UK companies are likely to exceed £1bn each year or more than £10bn over the next decade.
For instance, a worker earning £35,000 would generate additional costs of over £1,000 each year for the employer and £400 for the employee.
Sue Waites, partner at the firm, said: 'This change [the end of contracting out] could be as significant as auto enrolment, yet decision-makers have not really thought through the impact of the changes and who will be affected. Senior management could be in for a nasty surprise when they learn the true costs they have to bear.'
In a poll of 89 pensions, HR and finance professionals, Hymans Robertson found that a quarter (26%) with DB schemes had not addressed the end of contracting out and half were unsure about what to do.
The survey also revealed a gap between perception and reality for these key decision makers.
The poll found that half (50%) were unsure which changes they were likely to make to their scheme, while 29% say senior management don't know about the resulting costs and one-fifth do not know what impact the change will have on employees.
A further 10% said they were considering closing their schemes to future accrual.
Waites said that, although companies felt that they were on top of the end of contracting out, evidence suggested that many were 'sleep walking into trouble'.
But the facts were simple: if they do nothing, NI contributions will go up. 'Someone must plug this gap, whether it's the employer or the employee,' she said.
'This change will accelerate the decline of many DB schemes, ultimately sounding the death knell for some. There are around 4,000 schemes still open to accrual. Schemes that choose to close to future accrual will have to justify this decision and show it is an appropriate trigger for such an action.'
Yesterday, supermarket giant Tesco announced that it was planning to close its DB scheme, a decision that would leave only three companies in the FTSE100 with open DB schemes.
