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 60.

    '' You pay National Insurance contributions to build up your entitlement to certain state benefits, including the State Pension ''.
    So says the Official HMRC DirectGov website.
    draw your own conclusions.

  • rate this

    Comment number 59.

    I'm not expecting to recieve any state pension when I get to retirment age - population trends - so I understand the need for reform. I'm also not earning enough to pay into a pension - crazy rent prices and high prices for everything else. £50 a month (When at 4%) is a massive chunk of money to lose - it's around half my food budget. Or 15-20% of what's left to spend after bills.

  • rate this

    Comment number 58.

    Another government scam to help their financier friends steal our money.

    I have been in 3 schemes like this (including Equitable Life) and ended up with less than I paid in. Now I look after my own future and have saved more in a few years than the schemes accumulated over 20 and it's all mine to use as I wish. Don't fall for this con folks because that's what it is!

  • rate this

    Comment number 57.

    @41. loganwrangler
    .....You need around £200K to get £6000/yr. How many will achieve that?

    I think your figures are awry. I have an RPI indexed pension of over 35k a year from a 600k pension pot and started drawing it two years ago aged 59.

  • rate this

    Comment number 56.

    Look at the article's figures under the heading "How much pension?"

    So, some on £20k a year saves 8% and 40 years later gets a pension of £287 a month.

    That's why pensions don't work - the contributions are too high, the growth is too small and the amount you get from a pension provider when you retire is pitiful.

    You might as well put your money on the 2:30 at Kempton.

  • rate this

    Comment number 55.

    With inflation running at well over 2% any savings need to grow at a greater rate for the value of the money to be at least equal to the value it held at the point of investment. With such low interest rates it is hard for money to even keep pace with inflation. What is the point of saving money if it buys less in the future. This scheme could be a disaster for forced savers.

  • rate this

    Comment number 54.

    What happens when people change jobs? Always the problem even with the old company based pensions. People should only have personal pensions they keep wherever they work.

    Further the amounts being saved are derisory. Make it 10% of all levels of earning from the day you start working.

  • rate this

    Comment number 53.

    I agree, everyone should be saving for their pensions but this would appear fraught with potential problems and not very well thought through. Unless everyone, employees and employers, have to pay into a secure fund, it just leaves it up to the market and we have seen what an unfettered market can lead to if unchecked.

  • rate this

    Comment number 52.

    Radical reform?

    Is that where the government still take our taxes, and instead of paying us our well earned pensions - they give the money to the bankers.

    It looks like we're paying for our our pensions

  • rate this

    Comment number 51.

    Saving for pensions are a good thing although the key constraints are charges and the volatility of the performance of your fund.

    NEST is a good idea, fund charge low but the 1.8% contribution charge is high are others (e.g Mr Paphitis and Ms Brady )aware?

  • rate this

    Comment number 50.

    The problem with NEST is that it is more expensive than existing Stakeholder pensions and has a more limited fund range. The sensible solution would have been to have brought in some sort of auto enrolment in to the existing infrastructure rather than spending millions creating a new one, where all but one company pulled out, so the Indian company TATA won by default.

  • rate this

    Comment number 49.

    So the argument goes, work all you life, buy nothing, do nothing so you can afford to carry on doing nothing and buying nothing when you retire ?

    Do not know about anyone else but I had more hope for my life than just working to pay bills then retiring with enough money to pay my bills.

    Isn't the point of working that you can buy stuff likes cars ! mainly used to get to work quicker ?

  • rate this

    Comment number 48.

    Why not introduce another scheme whereby people pay taxation to be provided with a state pension - oh hang on we already do that???

    I am not convinced that private companies running pensions will work; I have had a private pension for 20 years, it is performing worse and earning less than the money would have earned in a savings account, while at the same time managers and execs take a fat cut!

  • rate this

    Comment number 47.

    Seriously, If you cannot afford at least £500 a month pension contribution, don't bother. Use the money to pay off debt, put it in an ISA. Try and build a 3 month income cushion to avoid overdraft fees and late payment charges. Don't even think that a few £ a month is going to make any difference or even grow enough to cover admin costs. The whole scheme will probably close within 10 yrs anyway.

  • rate this

    Comment number 46.

    The amounts that people will get back as a pension at these levels of contributions really show up how generous the public sector pensions are. Time for all people, both public and private sector, to have a common national pension scheme.

  • rate this

    Comment number 45.

    This could be a good idea, but it was done 60 years ago with National Insurance, and that's worked out well.

    With this system, the money's going to a private company, and they have a history of safe, secure guarding of our money.

    I await the stories upon my retirement saying they don't have the funds to pay my promised pension.

    It's not like that's happened before.

  • rate this

    Comment number 44.

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

    So your own strategy to provide you with an income in retirement such that you are not dependent on the diminishing taxpayer purse, is what exactly?

  • rate this

    Comment number 43.

    The pension industry is full of fund nibblers. Layers of 'managers' who cream off their %s each year.

    What is needed is a state managed pension fund - can't believe I just suggested that, obviously a senior moment.

  • rate this

    Comment number 42.

    The government and the stock market wide boys will steal most of your money, just like they always do

    You will be left with a very basic sum which will have a massive negative impact on your entitlement to any state benefits and support in your old age

    Fool me once shame on you

    Fool me twice shame on me

    You have been warned

  • rate this

    Comment number 41.

    By paying into a pension scheme anyone on low income or starting late is throwing money down the drain simply because it will be offset against what will be means tested in the future. You need around £200K to get £6000/yr. How many will achieve that?
    Guarantee no means testing then persuade me.


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