Workplace pensions for all

This week saw the introduction of the long-awaited “Automatic Enrolment” regime for workplace pensions. Conceived by the last Labour Government, it is now being implemented by the Coalition, with the intention of encouraging the large number of employees without access to a workplace pension scheme to get into the habit of saving for their retirement.

Perhaps surprisingly, a recent survey by Scottish Widows found that more than half of the UK workforce seems to be unaware of the impending changes, and very few of those who are aware have heard about it through their employers, suggesting that a large number of businesses are either failing to communicate to their staff or may be unaware themselves.

Starting with the very largest employers, the auto-enrolment programme will be rolled out over the next five years to all businesses, eventually reaching those employing just one member of staff (including casual workers and agency workers, but not volunteers or genuine contractors). Employers with fewer than 30 workers will start being caught by this requirement from June 2015. The DWP will write to notify you of your “staging date”, or you can look it up online: www.tpr.gov.uk/staging.

From October 2017 onwards, all employers will have an immediate duty to auto-enrol relevant workers.

From your staging date, you will be obliged to enrol into a workplace pension scheme any employee aged over 22 and under the State Pension Age who is earning enough to pay tax, and you'll have to make a contribution on their behalf. Other employees who are not automatically enrolled i.e. those who fall outside the age brackets or below the earnings threshold for tax, may choose to be included in the process.

If you don’t already have a workplace pension scheme which complies with the standards laid out for auto-enrolment, you can use the new National Employment Savings Trust (NEST) for the purpose. You don't have to set up a pension scheme all by yourself.

Employees will have a limited time in which to “opt out” if they don’t wish to join the pension scheme, but you will have to re-enrol them every 3 years, so the hope is that out of sheer inertia many of the 11 million or so people who don’t currently save in a workplace pension scheme will start to do so.

The financial burden will not be huge in the first instance; your contribution will start at 1% of the person’s “band earnings” (i.e. salary between the lower and upper National Insurance thresholds), in the first year, and will rise incrementally until it reaches 3% of band earnings. The employee will also have to make a contribution, which will attract tax relief. At the end of the phasing-in period, the total contribution going into each person’s pension fund will be 8% of their band earnings, of which the employer will contribute 3%, the employee 4% and the taxman 1%. Many employers will probably deal with the additional cost by limiting pay increases.

There will also be an administrative burden, which is likely to hit small businesses, which lack the manpower resources to keep on top of the record-keeping and communication requirements, the hardest.

There are question marks over whether a combined contribution of 8% of band earnings is going to add up to much of a pension by the time a person retires, and for some employees – those quite close to the State Pension Age for example – it may be in their best interests to opt out. Many people would be well-advised to contribute more if they can. However, on the basis that some extra retirement income is better than nothing, and given that the basic State Pension is not enough to provide for a comfortable old age, on balance this has to be a step in the right direction.