Pensions auto-enrolment attracts cautious welcome


Kerry Lightfoot, Morrisons employee: "It will be peace of mind that there will be something there at retirement"

A huge reform in pension provision for millions of low and middle earners has been given a cautious welcome by trade unions, employers and charities.

Staff at the UK's biggest firms have started to be automatically enrolled in a workplace pension, which both they and their employers will pay into.

The TUC said it was the beginning of a "pensions new deal".

But others warned that it could lead to people still not saving enough for their retirement.

It is designed to supplement the current state pension and to stem the drastic decline in workers' pension provision.

"Too many employers have walked away from their responsibilities, and now just one in three private sector workers are in a pension, threatening many with a miserable retirement," said general secretary Brendan Barber.

"Of course it can and should be made better, but we now have what should be a stable framework," he said.

Pensions Minister Steve Webb said the new system, considered the biggest change to saving for retirement for over a century, should work because it was so simple.

"You don't have all the hassle and complexity of choosing a pension. The firm chooses it for you, they put money in, you put money in, and then the only hassle is if you want to opt out," Mr Webb added.

How it works

Staff will either join their existing employer's scheme, or one of the new group schemes that employers can adopt, such as the National Employment Savings Trust (Nest).

Auto-enrolment criteria

  • Workers not already in a company pension scheme will be enrolled if they are aged between 22 and the state pension age
  • However, these workers must be earning at least £8,105 a year
  • The contribution they, and their employers, make will be based on their wage, although the first £5,564 a year they earn will not be taken into account
  • Any earnings above £42,475 will also be ignored in the contribution calculation
  • So the amount between £5,564 and £42,475 is known as their pensionable pay
  • Staff can opt out

The process of recruitment started with the biggest employers on 1 October 2012 and will then be staggered over the next few years until 2018. The smallest employers begin auto-enrolment for their staff in January 2015.

At the same time, contribution levels will rise slowly, to avoid giving either staff or their firms an unwelcome financial jolt while the economy is still in recession.

Contributions will start with staff paying in a minimum of just 0.8% of their pensionable earnings.

On top of that employers will have to pay in 1% of their employees' pensionable earnings, with tax relief contributing another 0.2%.

These contribution levels will eventually rise to 4% from the employee, 3% from their employer and 1% in tax relief, giving a total of 8%.

The contributions will be invested and then when the employee retires, currently at 55 at the earliest, they will have to buy an annual pension, or annuity, with their accumulated pot.

The employers' organisation, the CBI, praised the design of the scheme.

"The change is rightly being phased over many years, to ensure it remains affordable for businesses in these tough times," said director general John Cridland.

How much pension?

Critics, however, have suggested that this grand plan could lead to many people generating very small pensions.

Workplace pension graph

That may be because they will pay in only small sums during their working lifetimes, or because the investments will be at the mercy of financial markets, which may provide poor returns.

When the full 8% contribution rate is in effect, someone earning £20,000 a year would see £1,154.88 in combined contributions being added to their pot each year.

If they were aged 22, and then saved for 40 years before retiring at the age of 62, these contributions would eventually total £46,160.

If, over those 40 years, there was an average 3% a year return on the funds in which the contributions were invested, then the retiree would end up with a pot of £88,488.

According to the Money Advice Service, at the current historically low annuity rates this would provide a man in good health with an inflation linked annual pension of as much as £2,714 a year, or £226 a month.

Michelle Mitchell of Age UK said the government now needed to press ahead with plans for an underlying flat-rate state pension.

"We believe this would prevent people worrying about jeopardising means tested benefits if they are auto-enrolled and would give a clearer idea of how much money a person can expect when they retire," she said.

"We want to see the current contribution and transfer restrictions on Nest, the government savings scheme, lifted, so people can accumulate their savings in one place and eventually convert them into a good value annuity."

Opting out

Auto-enrolment timetable

  • October 2012: Firms with 120,000 employees or more
  • November 2012: 50,000 to 119,999 employees
  • January 2013: 30,000 to 49,999 employees
  • February 2013: 20,000 to 29,999 employees
  • March 2013: 10,000 to 19,999 employees
  • April 2013: 6,000 to 9,999 employees
  • May 2013: 4,100 to 5,999 employees
  • June 2013: 4,000 to 4,099 employees
  • July 2013: 3,000 to 3,999 employees
  • August 2013: 2,000 to 2,999 employees
  • September 2013: 1,250 to 1,999 employees
  • October 2013: 800 to 1,249 employees
  • November 2013: 500 to 799 employees
  • From January 2014: Firms with fewer than 500 employees in stages
  • From January 2015: Firms with fewer than 58 employees in stages
  • February 2018: Timetable completed

Source: The Pensions Regulator

Workers will have the option to opt out of the pension savings scheme, and will be given details of how to do this before they start to see their contributions being diverted from their pay packet.

"Some people might think about quitting their new pension, but we urge them to stick with it and get saving for their old age," said Joanne Segars, chief executive of the National Association of Pension Funds (NAPF).

"Leaving the pension would mean losing tax breaks and employer contributions which are, in effect, free money."

The Department for Work and Pensions said that, by the end of the year, about 600,000 more people in the UK would be saving into a workplace pension and by May 2014 about 4.3 million people would be signed up.

The eventual aim is to increase that figure to between six and nine million people by the end of the 2018, by when automatic enrolment will cover all employers.

Pension provision in the private sector has been in drastic decline in the past two decades, with fewer than three million private sector workers now paying into a company pension scheme.

In some cases employers simply do not provide any pension scheme for their staff at all.

In other cases staff do not join existing schemes, typically because they are low paid and fear they cannot afford to contribute, or because they work in industries such as catering where there is a high turnover of staff who stay in jobs for only short periods of time.

The concept of automatically recruiting staff to pension schemes - but with the possibility of staff then opting out - was first suggested by Lord Turner's Pension Commission in 2005.


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  • rate this

    Comment number 40.

    This is a great system for anyone that is offered it. As it is auto-enrolled it is down to the employee to opt-out if he or she wants to but would need an equal or better pension to replace it. Never again will private sector workers be without a guaranteed government backed pension. The public sector pension is being devalued as it is linked to wages and they are below inflation.

  • rate this

    Comment number 39.

    A better way of making sure that people save for their old age would be to place a 10% tax on every alcoholic drink, packet of fags, foreign holiday that they bought or any bet they placed. The resultant funds would go into their pension pot. Some of the unemployed living on benefits would end up with fabulous pensions.

  • rate this

    Comment number 38.

    I am the only worker in my company and so I don't have to register until later in 2017, by which time I will be 62.5 years old. I have sent them a note to say this is insanity for company owners like me, as I don't want to know about it, too old to make any difference. I'm taking my private pension now at 58, it will not be worth more in 5 years time anyway, but at least I'll have had something.

  • rate this

    Comment number 37.


    What would be the difference (other than the gvt instructing fund managers rather than employers)?

  • rate this

    Comment number 36.

    About time people were made to take responsibility for their retirement and not just rely on state handouts. What is also needed is a realistic review of retirement age and the state pension being means tested (why should a city fat cat on their huge private pension also pick up a state one )- although I am guessing no party will have the cahunas to do this.

  • rate this

    Comment number 35.

    Well, I've been contributing to my pensions all the time I've worked. I choose to pay the contributions ahead of Satellite TV subscriptions, big screen tellies, flashy cars, booze, fags, drunken binge night outs, junk food. Add up what you spend on that lot and put in in your pension first. A pension is not a luxury, it is a necessity, The list above you can do with out. Be responsibility...

  • rate this

    Comment number 34.

    just another con that allows money to be tied up long term and "invested" on our behalf.

    More gambling chips for the casino

  • rate this

    Comment number 33.

    The severe lack of Private sector pensions is the next ticking time bomb. This will probably explode in about 25 years time as very stupid short term people realise they do not have the proverbial pot to do anything in because they havent provided for their retirement. This idea wont work however because of the opt out clause which the majority will probably invoke.

  • rate this

    Comment number 32.

    As I understand this, the pension fund will be initially be used to help finance government loan repayments. Therefore, these pension contributions are really loans, it's like buying gilts without knowing the yield and without any form of protection. No thank you!!!

  • rate this

    Comment number 31.

    I can see employers getting around this legislation by 2 possible ways, 1) Staff employed on a temporary basis either direct or indirect, 2) Staff employed on a "Self employed" basis. The latter I can quite easily see being employed by small businesses especially in the articles example of a plumber employing 1 member of staff. Employment will become less stable than current.

  • Comment number 30.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 29.

    I thought we already did this through NI..?

  • rate this

    Comment number 28.

    Cheer up Edd Balls has all the answers, he just told everybody in his speech

    shame he didn't make sure it was done while in government

  • rate this

    Comment number 27.

    Another half-hearted pension scheme! Nobody with any sense trusts the pensions industry. What’s required is a national compulsory pension system which every person pays (say 5%) into, thus requiring so many units. The value of each unit is set by the return of all invested monies. The state would distribute the monies according to investment companies returns.

  • rate this

    Comment number 26.

    More funds for the money men to push around... All I would say is don't believe any of the hype surrounding what you will get when you retire because it won't be honoured. You'd be better off stuffing a matress with the money.

  • rate this

    Comment number 25.

    You will pay into it all your working life, but when you get ready to claim it they will move the goal posts, you will need to work another 5 years for it and you will get a pittance...

    A bit like what they have just done ...

  • rate this

    Comment number 24.

    Everyone needs to take responsibility for themselves and their financial future. It's a matter of priorities - if you think you need sky tv, a mobile phone, a car etc etc before you need a pension and then expect the state to provide for you, then you need to reassess your priorities. I think that once everyone gets used to saving rather than spending, they will realise that it's not so bad.

  • rate this

    Comment number 23.

    The Government have a poor record of helping people save. Viz Crash came in and taxed pensions as his first hit is a recent example. Government is not a body I trust with my money, they take and then give back less than is given, essentially jobs for the boys is the scheme being generated.

  • rate this

    Comment number 22.

    the trouble with these schemes is by the time you take management fees into account and then you have to buy an annuity which are generally quite poor the 'pay-back' is very unreliable. On the example in the article it would seem that it would take 32years to retrieve your contributions and you seem to get no benefit from the interest being gained on the 'pot' during that time.

  • rate this

    Comment number 21.

    These figures imply that you will have contributed 13 years’ worth of the pension contributions to the pension scheme. You would break even if you live to be 75. With life expectancy falling, is this a good deal?


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