Whether they know it or not, millions of workers will go through a race against time and ignorance next year as they are opted into pension schemes run by their employers.
As organisations are forced to enrol their staff in pension schemes, the Government, regulators and other experts are biting their nails in the fear that some of these plans will be sub-standard.
From 1 January, all employers with 30,000 or more workers will have to start the process of "auto-enrolment" for staff earning £8,105 or more a year. By the end of 2013, all organisations with payrolls of 500 people or more will need to be participating. By 2018 all employers will be included.
"It's an amazingly large social experiment," says Tim Banks of investment strategy manager Alliance Bernstein. "We are seeing a sea change in the distribution of pension products to consumers in this country," says Henry Tapper, director at First Actuarial. "It's happening much faster than anyone would have imagined. Everyone is in a state of shock."
While employees should receive information beforehand on these changes, the first time that many people will really become aware of what is happening will be when 1 per cent of their earnings are deducted from their pay and diverted into a pension plan arranged by their employer. The employer, meanwhile, will be adding another 1 per cent to the employee's pension pot. By 2018, employees will be contributing 4 per cent, employers will be putting in 3 per cent and there will be another 1 per cent top-up through tax relief.
Auto-enrolment started for the biggest employers in October. What is being said in public clearly shows there is a lot of concern behind the scenes.
"Many employers who will be selecting pension schemes for their workers have little or no experience of workplace pensions," said Michael O'Higgins, chair of the Pensions Regulator, in a speech earlier this month. He added: "I want to say explicitly today that, in our view, workers should not be automatically enrolled into smaller schemes which do not benefit from economies of scale, tend to be poorly run and do not deliver value for money in the charges they make to members."
Pensions minister Steve Webb has spoken of "dodgy" schemes, warning that the Government could disqualify them or cap the charges levied on employees. Employees may then be wondering if they are being sold a pup.
Asked whether employers are ready for the new regime, Tim Banks of Alliance Bernstein, says: "It's a very mixed bag. Some people have done the planning a long way in advance and others are very late to the party."
Charges represent a particular problem. NEST (the National Employment Savings Trust), the Government-established scheme manager which is open to all employers, deducts charges that amount to 1.8 per cent of contributions when they are put in and an annual management fee of 0.3 per cent.
There are signs that the regulator wants annual fees to total no more than 0.5 per cent, but this has not been clarified yet. The regulator, which has already set out a list of six basic standards for employers to meet, starts a consultation in January which might clear up this crucial point on the precise level of charges.
In the meantime, some people will ask themselves whether they should stay in a scheme where annual charges are much higher, perhaps 1 per cent.
Individuals have a right to opt out.
Henry Tapper says: "The pragmatic answer is never to turn down your employer's contribution. But, once enrolled, it's time to up the anti. Ask your employer to get a better plan. If your employer can't be bothered to upgrade, whinge to the regulator, and if you are in a union, enlist their support."
The Pensions Advisory Service (PAS) – which has also taken 1,500 enquiries on auto-enrolment from individual employees – also points people towards the Pensions Regulator if, according to a PAS spokeswoman, "they are concerned that their workplace pension does not meet the Government's quality standards".
Pensions providers claim 2013 will be a time of great innovation in scheme design. Employers which have existing schemes will be forced to review and upgrade them if they do not meet the new standards, they say.
Companies which design and manage schemes for employers, such as BlackRock and Alliance Bernstein, say technology will make schemes simpler to understand and control for employees. New, flexible "target date" schemes are replacing more rigid, old-fashioned schemes known as "lifestyle".
While most people who will benefit from auto-enrolment are expected to be the lower paid, some pension millionaires will, under the law, have to be opted in by employers. These are people who have accumulated more than the Government's lifetime limit of £1.5m and benefit from one of HM Revenue & Customs' "fixed-protection" schemes. In return for not investing more in pensions, they are allowed to keep their existing fund and rights.
Under the auto-enrolment regime, they still have to be opted in to a scheme by their employer. If these people are aware of the problem, they will know that they can opt out within one month and avoid a tax charge. If they are not aware then, says Tim Smith of solicitor Eversheds: "They could lose the protection and face a very nasty tax charge."
That could be as high as 55 per cent of the excess over the lifetime limit. Mr Smith believes that up to 30,000 high-earners could be affected here.
However, for most of the 11 million who are being opted into employer schemes, far more important questions will be whether they can afford the contributions and whether they have faith in the new system. The Government will watch closely when schemes start to publish figures on the numbers who elect to opt-out. A quarter of staff (24 per cent) have opted out of The Pension Regulator's own scheme. The Government might accept this level as satisfactory if it is reflected across the country. But early signs suggest a big variation from employer to employer.
"You'll get quite a marked difference, depending on the attitude of each employer and how they position the opt-out document," says Steve Rumbles of BlackRock. He thinks too many people will opt out for the Government to accept auto-enrolment as the way forward. "The decision will end up being taken that compulsion needs to replace this system," he said.
Who will be affected?
Employees will be auto-enrolled into an employer scheme if:
* They are 22 or over and under state pension age;
* They earn more than £8,105 a year;
* They work in the UK;
* They are not already enrolled.
Case study: Part-timers underwhelmed by auto-enrolment
Danny works part-time stacking shelves in a supermarket where auto-enrolment has recently been introduced.
"I would think that the senior management who intend to be there a long time and who are a bit more educated are looking at it [auto-enrolment] in a professional manner and are going at it whole-heartedly," says the 63-year old. "The lesser people, the shop-floor people, who want money in their pockets and sod making contributions because they can't see further than their nose, they are opting out."
Danny has received a letter telling him that he earns under the threshold (£8,105 a year) and so will not be included.
He is extremely glad of that, having built up his own pension in the past and feeling that pensions "are a fiddle".
He gives traditional pension plans a mark of 4/10 because of the charges levied on them, but he would give an 8/10 if individuals were allowed to manage their own pension pots and keep the charges down.
Danny does not think that auto-enrolment will be a success at the bottom levels of his company.
"The majority of the lesser people are opting out. They don't know if they are going to be with the company for 15 or 20 years."
Susie, Danny's partner, works for a well-known furniture chain and will probably soon be opted into her employer's scheme.
Right now she is confused about it because much of her earnings are in the form of commission, and she says: "I don't know how this stacks up with commission."
In fact, bonus and commission earnings are included and she could well exceed the eligibility threshold even though she also works part-time. But if she is opted in she will almost definitely opt out.
Money Advice Service:
The Pensions Advisory Service (free, independent help on pensions):
http://www.pensionsadvisoryservice.org.uk and helpline 0845 601 2923
The Pensions Regulator: http://www.thepensionsregulator.gov.uk and 0845 600 7060