All change on pensions as workers are opted in

But fears remain some new plans will be sub-standard, says Neasa MacErlean

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.

Links

Gov.uk: https://www.gov.uk/workplace-pensions/about-workplace-pensions

Money Advice Service:

https://www.moneyadviceservice.org.uk/en/action_plans/make-the-most-of-automatic-enrolment

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

Independent Partners: 10 top tips for retirement. Get your free guide here

Life and Style
health

Do you qualify – and how do you get it?

News
Food blogger and Guardian writer Jack Monroe with her young son
people
News
Privately schooled, Oxford educated and a former editor of arguably the world's poshest magazine 'The Lady', it's perhaps unsurprising that Rachel Johnson rarely mixes with ordinary Proles.
people

The Mayor of London's sister, Rachel Johnson, apologises for shocking tweet about the PM

News
people

Actress isn't a fan of Ed Miliband

PROMOTED VIDEO
Life and Style
Fraud contributes 11p to a £2.00 box of half a dozen eggs
Sport
Dejected England players applaud the fans following their team's 3-0 defeat
football

News
people
Arts and Entertainment
A still from the Jurassic World trailer
film

Video: The official full-length trailer for the Jurassic Park sequel has dropped – two days early

Environment
The plant ‘Nepenthes zygon’ was donated to Kew in 2004
environmentNepenthes zygon had been growing for almost a decade and helping to keep down cockroaches
News
This artist impression shows a modern-day Atlantis
news
Arts and Entertainment
booksPhotographer snapped celebrities for 40 years - but it wasn’t all fun and games
News
i100
Sport
Aguero - who single-handedly has kept City's Champions League dreams alive - celebrates his dramatic late winner
footballManchester City 3 Bayern Munich 2: Argentine's late hat-rick sees home side snatch vital victory
News
peopleSinger tells The Independent what life is like in rehab in an exclusive video interview
News
Muhammad Ali pictured in better health in 2006
peopleBut he has enjoyed publicity from his alleged near-death experience
Arts and Entertainment
Tony breaks into Ian Garrett's yacht and makes a shocking discovery
TVReview: Revelations continue to make this drama a tough watch
News
news
News
The assumption that women are not as competent in leadership positions as men are leads to increased stress in the workplace
science... and it's down to gender stereotypes
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Citifocus Ltd: Product Development - Asset Management

    £Attractive: Citifocus Ltd: High calibre individual with significant product d...

    Citifocus Ltd: Credit Ratings - Banking Sector

    £Negotiable: Citifocus Ltd: Leading global bank seeks experienced credit analy...

    Citifocus Ltd: Economic Crime Investigation & Analysis

    £Attractive Package: Citifocus Ltd: High calibre individual with a high degree...

    Citifocus Ltd: Snr Risk Analyst - Capital & Liquidity

    £Attractive: Citifocus Ltd: High calibre individual with superior academics an...

    Day In a Page

    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?
    Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

    24-Hour party person

    Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
    Michelle Obama's school dinners: America’s children have a message for the First Lady

    A taste for rebellion

    US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
    Colouring books for adults: How the French are going crazy for Crayolas

    Colouring books for adults

    How the French are going crazy for Crayolas
    Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

    What would you do as a local politician faced with an impossible choice of cuts?

    Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
    Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

    Call me Ed Mozart

    Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
    10 best stocking fillers for foodies

    Festive treats: 10 best stocking fillers for foodies

    From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
    Phil Hughes head injury: He had one weakness – it has come back to haunt him

    Phil Hughes had one weakness – it has come back to haunt him

    Prolific opener had world at his feet until Harmison and Flintoff bounced him
    'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

    'I am a paedophile'

    Is our approach to sex offenders helping to create more victims?
    How bad do you have to be to lose a Home Office contract?

    How bad do you have to be to lose a Home Office contract?

    Serco given Yarl’s Wood immigration contract despite ‘vast failings’
    Green Party on the march in Bristol: From a lost deposit to victory

    From a lost deposit to victory

    Green Party on the march in Bristol
    Putting the grot right into Santa's grotto

    Winter blunderlands

    Putting the grot into grotto
    'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

    'It just came to us, why not do it naked?'

    London's first nude free runner captured in breathtaking images across capital