The coalition government is to press ahead with a Labour scheme to force all UK firms, regardless of size, to automatically enrol their staff into a pension scheme from 2012. Companies will have to pay in a minimum of 1% of every worker’s salary into a pension, rising to 3% by 2017. Workers will have to pay in a portion of their salary, phased in over five years, starting at 1% of pay and rising to 4% by 2017.
Every employer, large and small, will have to participate, although not the self-employed. It will mean that hundreds of thousands of small firms that currently do not offer or pay into a pension scheme will have to begin making payments. Many are expected to opt to use a new government-run pension scheme, called ‘Nest’ (National Employment Savings Trust), which proposes low costs and charges.
But pensions minister Steve Webb has stepped back from earlier proposals to make workers pay in from the first day of employment. Instead there will be a ‘waiting period’ of three months before an employee is automatically enrolled, unless they ask to join earlier.
The level of earnings at which employees will be enrolled will also rise from Labour’s proposed figure of £5,035, to £7,475 (the personal allowance for income tax from April 2011).
It is expected that Nest will grow to become one of the biggest pension funds in the country. Nest officials project that it will grow to between £50bn-£100bn in size within thirty years*. The money will be invested in shares and bonds, although Nest says it will be a low-risk fund, largely invested in ‘passive’ instruments such as index-tracking funds.
Employers who fail to make payments on behalf of their workers will face sanctions from the Pensions Regulator, which will have the power to fine non-compliant companies. Employees will still have the right to opt out of the pension arrangements, but officials believe that auto-enrollment will mean that many more will start saving than at present.
Employers currently pay an average of 6.1%* of workers’ salaries into their pensions. Critics say the changes may lead to some employers reducing their contributions to a minimum, with the norm dropping towards 3%.
There are also fears that low-income earners will simply lose means-tested pension benefits, such as pension credit, as they are forced to accumulate a small pot of money for retirement. Earlier this month plans for a new universal pension worth £140 a week per head were leaked, with the details set to be published in a green paper. But there is speculation that once Britain moves towards a higher basic state pension, plus greater private saving through Nest, there may be the progressive withdrawal of other schemes such as pension credit and the state second pension, formerly known as Serps. Pensions will also be paid later, with the government already committed to raising the state retirement age to 66 in 2020.