Stand by for a pensions shake-up: Auto-enrolment is imminent

It is already causing controversy, says Rob Griffin

Millions of employees will soon have access to a pension due to the introduction of auto-enrolment into workplace schemes, which the Government hopes will result in more people enjoying a comfortable standard of living in later life.

The new legislation, which is being phased in over the next five years, is being championed by ministers worried by statistics revealing that seven million people are not saving enough for retirement at a time when life expectancy is rising.

But auto-enrolment is already causing controversy in some quarters, with businesses raising concerns as to how they will be able to fund workplace schemes and question marks over whether enough has been done to inform employees of how the landscape is about to change.

So what is happening and who will be affected by the changes?

What is going on?

From 1 October, the Government will be introducing auto-enrolment into workplace pension schemes, and compulsory employer contributions, for those meeting set criteria.

The largest companies will be the first affected, with all firms having to enrol workers by April 2017.

An employee will be eligible for automatic enrolment into such a scheme if they are not already in a pension at work, are at least 22 years old and under the state pension age, earn more than £8,105 a year and are employed in the UK. They can, however, opt out if they want.

In addition, companies must enrol any non-eligible job holders who give the employer an opt-in notice into an automatic enrolment scheme, unless they are already an active member of a qualifying scheme with that employer.

According to Steve Webb, the pensions minister, builders, waiters and gardeners will be among those to benefit, with research showing that construction, distribution, hotels, restaurants, agriculture and fishing are the least likely industries to have workplace pensions.

"Pensions are far too important to be the preserve of the few," he said. "All workers deserve a decent income in retirement, and far too many are missing out at the moment, particularly those on low to moderate incomes who need them the most."

How will the system work?

Employers will have to provide a qualifying scheme for workers, automatically enrol all eligible job holders onto it, and pay employer contributions. In addition, they will need to tell those eligible that they have been automatically enrolled and can opt out if they wish.

The Government has set a minimum percentage which has to be contributed into a workplace pension in total by a combination of the employee's contribution, the employer's contribution, and tax relief. This minimum starts at 2 per cent and increases to 8 per cent over the next few years.

As part of the overall percentage, the Government has also set a minimum percentage which has to be contributed by the employer, starting at 1 per cent and, over the next few years, rising to 3 per cent.

What should staff do?

It will be up to the individual to decide if they want to opt out of a workplace pension, but for most people it would be wise to stay in it as they will benefit from contributions by their employer as well as the Government in the form of tax relief. This is effectively free cash towards their future.

However, while auto-enrolment is a step in the right direction for millions of people, it won't guarantee them a stress-free retirement, warns Ros Altmann, director-general of Saga, who insists that people shouldn't be relying on a pension.

"By including individual savings accounts (Isas) as part of workplace saving and by making pension funds partially accessible, we could help generate a more active savings culture that will better help people prepare for their retirement and later-life care needs," she said.

Andy Gadd, head of research for Lighthouse Group, agrees. While acknowledging that the decision whether to opt for a pension is not necessarily clear-cut, he makes the point that it's essential to start saving for your old age as early in life as possible.

"Ultimately, however, the best solution for virtually every investor is probably a balance between Isas and pensions, using a pension for the initial tax relief and savings discipline, and an Isa for the flexibility and tax benefit on income," he added.

What should companies do?

Auto-enrolment is likely to affect companies in a number of ways, so the sooner an employer can start thinking about it the easier it will be to make the necessary adjustments, according to Lynn Graves, corporate pensions expert at Scottish Widows.

"Cashflow is a key consideration from an employer's perspective so planning it early means it won't suddenly cost them a lot of money," she said.

What needs to be done will largely depend on a company's existing approach to pensions. "It will range from those that have a paternalistic approach to their employees and are already well-provisioned pension-wise, to those that haven't given it any consideration in the past," she said.

For example, companies that already have a pension scheme in place will need to check it qualifies under the new regulations.

What do the experts think?

Tom McPhail, head of pensions research at Hargreaves Lansdown, believes auto-enrolment will help kick-start a long-overdue rebuilding of the UK's pension system, but warns there are still issues to tackle.

"The underlying message is that this is a good thing," he said. "We need to continue working on getting everybody to take more of an interest in how much they're saving and when they might be able to afford to retire."

Factors which may be a concern include fears that people will end up in a pension into which not enough money is being paid, or where the default investment strategy they've chosen isn't one that will best meet their needs.

"There are also issues surrounding the mechanics of auto-enrolment," he added. "Thousands of employers will be looking for the pensions industry to provide them with a solution, so there are misgivings about how this may be handled."

In addition, there are questions over the Government's longer-term vision for reform of the state pension with a promised White Paper on the subject so far failing to appear. The full, basic state pension in 2012/13 is £107.45 per week for a single person.

There is also more work to be done in terms of raising awareness of automatic enrolment, according to the Scottish Widows Workplace Pensions Report, September 2012, which reveals more than half (52 per cent) of full and part-time workers are unaware of the impending changes.

Thanks to Fay, VBH has already found its Nest

Fay Keddie's determination to introduce a workplace pension scheme when she became finance director at hardware company VBH three years ago has paid off, as the business now has the structure in place to cope with the requirements of auto-enrolment.

"When I came here I was surprised that effectively no-one was in a pension scheme," she recalled. "It didn't look like there'd been any encouragement for individuals to join and the company hadn't offered any contributions."

Knowing the Government would soon bring in legislation to change that, Ms Keddie (pictured) looked around for a suitable provider and decided on Nest, a scheme for employers to use for UK-based workers.

One of VBH's employees to have benefited is Andy Gibbons, 42, a married father of three.

"When the opportunity came up for the company to contribute towards a pension scheme for me I jumped at it," he said.

"I have been brought up to realise the importance of providing for yourself in the future as no one's going to hand it to you on a plate."