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 840.

    4 Minutes ago

    Give it a few years until the uptake is fairly high.

    They will then announce that state pensions will become means tested.

    Bammmmm, theres your moneymaker.

    That's what I'm thinking. They're up to something again.

  • rate this

    Comment number 839.

    Financial markets offer poor returns, apparently and in fact these days. So, why is that?

    Well, it is because of the amounts of money taken from the current account in dividends paid to investors. This is as silly as it gets and prevents share prices reflecting true value.

    Daft as these comments seem - they are not.

    Annuities are stupid - as dumb as it gets and being proven right now.

  • rate this

    Comment number 838.

    Look, pensions do not work. They are essentially gambling on the stock market. The pension company NEVER loses this gamble. They charge you for the privilege of playing with your money. If the gamble happens to pay off then they also take a huge slice of that before adding it to your fund. And then you retire. If you don't live for another 30yrs then they win again. Who is conning who here?

  • rate this

    Comment number 837.

    Give it a few years until the uptake is fairly high.

    They will then announce that state pensions will become means tested.

    Bammmmm, theres your moneymaker.

  • rate this

    Comment number 836.

    Heard " employers will pay " - " extra free contribution ". Don't know who these employers are, but can say as fact, prices of everything will rise. Profit margins will not be cut to pay for your pension. My wage will stagnate, prices will rise & I will have more wages deducted at source. Did anyone think of this, before just going ahead with it ?

  • rate this

    Comment number 835.

    My pension plan is to carry on smoking and drinking so I won't need one!

  • rate this

    Comment number 834.

    829. purple
    Have a look at
    "a non-departmental public body (NDPB)"
    "government Ministers are ultimately responsible to Parliament for the effectiveness of decisions made by NDPBs"
    Annual Management Charge 0.3% and 1.8% on new contributions until they cover their costs of setting up.
    I wonder if any relatives or friends of ministers have their fingers in this pie.

  • rate this

    Comment number 833.

    I breathe a sigh of relief when I have managed to pay my rent at the end of every month. I suppose in a way, I am contributing towards a nice comfortable retirement, that of my landlord.
    But hey, this is capitalism. I just need to become too big to fail somehow, then you lot can work your socks off to look after me like royalty.

  • rate this

    Comment number 832.

    Problems with pensions do not lie in the future. There will be no pensions in the future because a universal investment on that scale, cannot deliver the required returns. Pensions are funded from the current account and whilst that is not obviously apparent, it is fact.

    The problems with pensions are here and now, having brought about havoc since revaluations in 2006/2007 in new accounting rules

  • rate this

    Comment number 831.

    I would wish to be satisfied that any private employer or groups pension scheme was robust and safe from market. forces. Otherwise despite the employer contribution, there is a risk that your provision for your old age isn't. There were times in my early years of working for the public service when I considered opting out of superann. - now post retirement I am very glad I didn't.

  • rate this

    Comment number 830.

    I personally think that what we need is to adopt the Aussie system where most people pay 30% tax, basically one deduction which includes NI, have 10% vat so that we can still afford stuff, Zero tax on healthy products and make all employers pay 9% in addition to pay, into a “pension” with a 9% tax reduction for the self-employed so they can pay their own pension, this would be fair.

  • rate this

    Comment number 829.

    I wish to know, ahem..... ahem, ahem..... ahem!

    What the National Employment Savings Trust (Nest) is precisely, AND, how it is intended to operate.

    Is it a Trust which will invest in investments.

    That so, l would like to know that side of matters and don't think l should have to sit here wondering what l have just wondered.

    As one and all have witnessed since 2008 - Trust is not enough.

  • rate this

    Comment number 828.

    818 Rodders the current government are not responsible for this that's what they were alluding to. This was started by Brown in 2007 and passed in 2008 to start in 2012 that's how quick things work in politics

  • rate this

    Comment number 827.

    I have seen every pension scheme any government as come up with and not one of them is worth the paper they are writen on because every time these pension schemes seem to be going pay out well for pensioners one government or another come a long to make them worth less like Graduated Pension, Private pension schemes that have all been a waste of money as you have paid in more than you get out

  • rate this

    Comment number 826.

    Call me cynical, but why does the Gov. want us to have this. Altruistic motives ?? Want us to have more disposable income after retirement. Sorry no matter the colour of the party, which seems to be light green amongst them all. There's more to this than they're letting on, they're not as daft as some would like to believe.

  • rate this

    Comment number 825.

    A loophole in pension schemes even final salary schemes is that if the pension funds run too low they can wind up the scheme and just give you a lump sum!

  • rate this

    Comment number 824.

    How long before the government see all this money and decide they want some of it. They ruined final salary schemes, it won't be long before they want some of this scheme. How much will they leave for you?

  • rate this

    Comment number 823.

    815. bangers64
    Wealth generators yes, fair tax payers as a proportion of their income no. As astute business people they will by nature, preserve wealth by barely legal means that are only affordable & cost effective to them. The tax & pension systems are in desperate need of simplification, so such devious behavior is obvious and it can be easier to bare responsibility & gain respect.

  • rate this

    Comment number 822.

    Its a fact the state pension is £107.45 single person this can be topped up to £158 with pension credits, there is a minimum guaranteed state pension. I would love to know how much money will be taken nationally in admin and management fees and how much profits for pension companies with this legislation create! And who works for 1 company all their working life these days 4 schemes + !

  • rate this

    Comment number 821.

    "820. Graftwood Its the annuity you have to buy that puts me off"

    You don't have to buy an annuity these days - you can just dip into the pot (what's known as "income drawdown")


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