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 80.

    many people, particularly those on low incomes, are struggling to buy food and put fuel in the car at the moment.
    How do they pay into a pension to save for 40 years ahead, with the possibilty they may even lose it in the next financial meltdown??


  • rate this

    Comment number 79.

    Government is desperate to retain low pension benefits. To do this they require us to save for retirement. There is not universal availability of pension savings schemes. SO...

    NEST a poor value for money LT savings plan linked to an annuity Your pension will currently be less than the interest your fund could attract.

    All risk is with saver. bank/gvmnt cash in.

    FSA should investigate

  • rate this

    Comment number 78.

    There is no point in saving for your own pension in the end. Particularly for the lower end of pay. All that happens is your savings get used instead of the state giving you a minimum anyway, through means tested benefits. Meanwhile the rapacious financial 'advisers', commission takers, have lived it up off your attempt to save.

  • rate this

    Comment number 77.

    Forcing people to have a pension is an excellent idea.

    However, pensions should be safeguarded/ringfenced/protected from the shysters who gamble with our dotage. We've been putting into pension pots for over a century, and yet there are still HUGE issues with the final payout.

    I don't know a single person who has got out the promised amount, this is wrong.

  • rate this

    Comment number 76.

    Generally, people still haven't got a clue how pensions are administrered or invested and invariably loose thousands by the time they retire due to bad advice.

    Try to transfer a pension, try to cash one in, try and obtain a statement, try and understand a statement and hidden charges! All difficult hurdles.

  • rate this

    Comment number 75.

    Why does this new scheme immediately have such negative commentry. We're living in a world encompassed by debt and yet people immediately turn their noses up at what is essentially a saving scheme. People just expect to get everything for nothing.

  • rate this

    Comment number 74.

    People are wary of pensions because of what Gordo did when Labour raided pensions & extracted £3Bn /year during their 13 years.
    By all means save for a pension but if you want to know with some degree of certainty that when it's time to collect it will still there, do yourself a favour & put it under the mattress. Do not trust the govt They will find a way to deprive you of it just like last time

  • rate this

    Comment number 73.

    It seems like its the conscientious people who save all their lives and have pensions who suffer the most. There is no telling when the government of the day will pull the rug from under our feet and one's pension and savings nest egg becomes worthless or subject to a horrendous new tax.

  • rate this

    Comment number 72.

    I'm fed up with reading go without this and that!

    I work, have no sky TV, no xboxes, no PS3's, no wide screen tv's, no microwave, and have at times gone without food so that my kids have been able to eat!

    Some of you need to realise, there is NO WAY some of us can afford to put into a pension and still survive!

  • rate this

    Comment number 71.

    I'm just trying to figure out just how the government - any of them - will fiddle this out of us.

  • rate this

    Comment number 70.

    Governments love pensions because they become juicy cash buckets they can abuse someday as needed by changing the rules. Evidence :-

    1) brown's dividend tax raid 1997+
    2) QE and forcing pension funds to "invest" in "safe" assets like government bonds
    3) Nationalising royal mail pension scheme
    4) Clegg's wheeze to keep house prices artificially high
    5) get rid of 25% lump sum soon is my guess??

  • rate this

    Comment number 69.

    The liabilities of the government program is simple: no one predicted or could predict the average age increases for UK citizens.Despite bad habits,climate,and diets the Brits are healthy

  • rate this

    Comment number 68.

    @57.Stoic said "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."

    Can you do me a favour Stoic - tell me who your annuity provider is, because I'd love to get those sort of rates. At present £600k would get you only £25K for a single life, 5 yr guarantee, RPI escalator.

  • rate this

    Comment number 67.

    There are 2 fundamental problems that make pensions exceedingly poor investments:
    1) the Government rip too much out of our contributions and the so called proffits the prnsions Co manage to make.

    2) the pension Co take enormous fees from our contributions.

    The combined result is that around half of your pension pot is siphoned off.

    Fix this and people will start to invest again.

  • rate this

    Comment number 66.

    Another Golden Handshake for the "CONTRACT OVERPAID CONSULTANT" that thought this gimmick up...whatever next

  • rate this

    Comment number 65.

    60. John G

    If you think £107 per week at today's prices is going to keep you in the manner to which you have become accustomed when you are in retirement, then you are right, why fund another pension. Most people probably aspire to a retirement with a higher standard of living than that. If so, they need to ensure they have some additional pension arrangements.

  • rate this

    Comment number 64.

    I know this sounds harsh - but many people who spend money today on holidays / plasma tv's; 4x4's and dining out will be the 'little old lady (or man)' shown on TV in the future struggling to get by on the State Pension. We can't afford as a country to pay a State Pension that will be enough for people to live off so if this scheme helps force people to prioritise their money - I think its needed.

  • rate this

    Comment number 63.

    If the Fat Cat pays in his 8% - in cash terms probably significantly more than the average - why should he not reap the rewards? Seems fair to me.

  • rate this

    Comment number 62.

    I am sick of people telling me that my generation (I'm 44) are the ones who are being a drain or will be a drain as we move to retirement age...Over the past 22 years I have paid approximately £51k through national insurance contributions, I have been unemployed 8 months in that time costing £1600 I've still got £49k in the bank then? Wrong!! Insurance against what!!!

  • rate this

    Comment number 61.

    The government need to sort out the private pension providers.
    They take an average of 38% of a savers pension pot in admin charges and other fees.
    There is a requirement for transparency on charges, preferably a statutory maximum.
    Pension saving is a long term investment, the history of the financial services sector shows they are the least suited to look after pensions.


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