Do you understand pensions? If not, you will have to learn because a pensions revolution is coming.
From October, all UK employers will start having to enrol their workers into a pension scheme. Initially the largest firms, then by 2018, every single employer in the country must have a pension scheme. Even working mothers will have to provide pensions for their nannies. Eventually, at least eight per cent of salary will go into the workers’ pensions (four per cent taken from employees, three per cent from the employer, plus an extra one per cent from tax relief).
Employees over age 22, earning above the minimum tax threshold, will be automatically put into a pension scheme, but after being enrolled they can choose to opt out. Employers must re-enrol those opting-out every three years, to keep “nudging” as many people as possible to save.
The Government believes this will mean millions more people have private pensions, as most will not bother to opt-out once they have been put in. By contrast, workers currently have to positively choose to join and increasing numbers do not bother. The Government has set up a national pension scheme, called NEST (National Employment Savings Trust) to provide low earners and small employers with carefully-chosen, low-cost investment options. However, employers will still have to cope with complex contributions, calculations and pension administration to assess which employees are eligible to be auto-enrolled and pay the right contributions at the right time. This could be a nightmare for small employers, particularly those with no experience of pensions.
While this policy has widespread support, it will impose extra burdens on employers. Forcing companies to contribute to workers’ pensions will mean some firms having to scale back pay rises, or cut staff. Others, with existing pension schemes, may “level-down” contributions to the three per cent official minimum to save money.
Will this policy succeed? Time will tell, but with pension confidence at an all-time low, many workers, such as graduates with debts or low earners reluctant to lock money into a pension for decades, may be right to opt-out. If so, the Government might make auto-enrolment more flexible, perhaps allowing some of the money to be used before retirement for student debt repayment or buying a house, instead of being in the pensions “locked box.” 2012 is just the beginning of the pensions revolution — there is more to come.
Ros Altmann is the director general of Saga and a former government pensions adviser