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 320.

    It give opportunity for a next desperate Gordon Brown type Chancellor to assault pension pots & wreck the modest pension provision of "the masses", if the low capital return benefits are not already stripped first by significant "pension provider" costs. Government should hardly be surprised we have little confidence in saving for a pension. Another institution almost damaged beyond repair.

  • rate this

    Comment number 319.

    I believe it said "inflation-linked"?
    Do you know the difference of 4k in money terms and 4k inflation-linked?
    It's a type of investment guarantee that's highly valued at the moment.

    If you don't like it, maybe you can hold on to your 112k and see how much you can get in real terms. (That's if you understand the meaning of "real term")

  • rate this

    Comment number 318.

    157. Sensibly Reckless
    So I've been putting my money into a small private pension.

    At the current rate things are going, official retirement age will probably be raised to the level I never get to see any of it."

    You can withdraw from a PRIVATE pension any time from 55 onwards - even if you are still in work. Whether it would be wise or not is a different matter.

  • rate this

    Comment number 317.

    So while Big Business, Banks, Corporations etc want pension funds to invest into them under the false guise of paying dividends in return, they still have no rules/laws etc to make them payout if they do not want to.

    An example here and I know here the company is US, but Apple in the past few months have only just started to pay out dividends to shareholders after 17 years of not paying them.

  • rate this

    Comment number 316.

    Is there something we should know about pension account managers? I know of no other group of people who are so resolutely unsuccessful in their jobs but government after government does everything they can to keep them 'employed' and off the street.
    Or is this just yet another desperate attempt to prop the stock market up?

  • rate this

    Comment number 315.

    The sums just don't work out, do they? A pot of £112,000 gets you £3,400 a year. Are these insurance companies taking the p...? You'd have to live to 150 before that made any economic sense!
    We'll be lucky to see 75 when the tories have finished wrecking the NHS.

  • rate this

    Comment number 314.

    Sorry - see my post 173.
    The investments were diversified.
    I was badly advised, but to take that up, I'd need the £35k I no longer have...

  • rate this

    Comment number 313.

    The main reason why public sector workers have reasonable pensions is .. because for 30+ Years they choose to pay in around 6% to 15% of their pre tax income into them.

    And don't forget that they also chose to protect themsleves by joining Trade Unions. If others did so better employer schemes would be negotiated.

  • rate this

    Comment number 312.

    Give back my 28 years NI Pension contributions with interenst and i will invest somewhere other than a pension.

    You still haven't answered his question - what would you invest the money in ?
    Every investment type carries risk. There is no "magic solution". All you can do is try to understand the risks involved and balance it against the expected return...

  • rate this

    Comment number 311.

    People who have never paid into a pension scheme get their state pension topped up with pension credit - lucky them. People who pay into pension schemes end up with a tiddly little pension which prevents them from getting benefits that others get for no effort at all. I think people will need a lot of convincing that there will be any benefit to this scheme - I'm not convinced.

  • rate this

    Comment number 310.


    If you think any of the main corporate lobbyist-infiltrated parties would have acted with the interests of the 99% in mind, then you're not mistaken, you're blatantly delusional.

    The problem is the whole system, and changing the whole system is not an easy thing to achieve when the 'system' itself fights to stay in power.

  • rate this

    Comment number 309.

    #297 alexicon.
    If everyone saved instead of spending, what happens to the UK economy.
    Our political class have engineered the UK economy into one based not on manufacture but on consumer spending.
    That is not to say that people should not save towards their retirement.

  • rate this

    Comment number 308.

    Trust is a major requirement for longterm investment, The Guilts sold to support QE that keeps interest rates and annuity yields low is bought by the Pension funds. Cosy that, inspires confidence !

  • rate this

    Comment number 307.

    The elite are getting desperate, now forcing people into a ponzi scheme to keep the scam going.

    Any money paid into a pension now is immediately paid out to current and upcoming baby know the ones who rode the gravy train for the last 20 years and want it to continue in their retrirement at your expense.

    You meanwhile get an annual statement saying your pension is £2k per year.

  • rate this

    Comment number 306.

    282. typicallistener
    So if you save £100 a month for 40 years, you might get £287 a month pension for 20 years...Hardly exciting. The whole pension thing needs re working from scratch, especially the annuity angle."

    I agree with scrapping annuities. But if you only save £100 a month, how much would you expect to get? Where would the extra money magically come from?

  • rate this

    Comment number 305.

    As far as I am aware, the minimum pension provided by the state if you do not have your own savings, income or pension is £107.45.
    Pension Credit works by topping up your weekly income to £142.70 (That’s £35.25 Extra)
    You may also get additional Savings Credit which can be up to £18.54
    Total losses by having your own pension could be (£53.79 per week or £2,797 per year )

  • rate this

    Comment number 304.

    Another Tory policy to reward their friends in the markets who will rob us blind at the first opportunity.

    best get prepared for the annual statement of how underperforming our pensions have been.

  • rate this

    Comment number 303.

    Believe me, the majority of employers are not ready for this and some of those that do know about it have put it to one side as they don't understand it. Employee Benefits Consultancy firms have opened their pots of glee and are rubbing their hands vigorously over the thought of the additional consultancy fees the Govt have yet again given to them on a plate.

  • Comment number 302.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 301.

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


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