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."

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

Finacial products from our partners
Property search
  • Get to the point
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

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

    £21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders