Starting in October 2012, millions of employees will be automatically enrolled into workplace pension schemes for the first time. Employers will be required to establish a pension scheme for their staff and they must also make a contribution to each employee’s pension. These duties will start first for the largest employers, but all current employers will be required to enrol their staff in a pension scheme by 2017.
Auto-enrolment will significantly increase the numbers of people participating in workplace pension saving. The Government’s design of the programme gives individuals the freedom to opt out, but they will be required to make an active decision to do so. Participation rates are expected to be high and millions of people are likely to benefit for the first time from employer contributions and tax relief from the Government. The minimum annual contribution rate (equivalent to 8% of an employee’s salary)has understandably been set initially at a modest level. This approach is realistic in the short term. However, the Government should review this level in 2014 with a view to encouraging people to make higher contributions over the longer term to help them secure an income in retirement which they are more likely to regard as adequate.
Auto-enrolment was always intended to form part of a package of measures which would also include reform of the State Pensions system, to reduce the level of means-testing and enable people to see clear benefits from retirement saving. The Government should proceed with its welcome plans for State Pension reform without delay and introduce a Bill to this effect at the beginning of the 2012–13 parliamentary session.
The Government has established the National Employment Savings Trust (NEST)to offer a simple, low-cost pension scheme to employees on low to moderate earnings. NEST is required to be available to all employers who wish to use the scheme to meet their autoenrolment requirements, including businesses that existing pension providers may consider loss-making or not commercially viable. The existence of NEST in the pensions market has increased competition and encouraged other providers to offer lower charges and has also prompted improvements in the way in which the pensions industry communicates with its customers.
The Government has placed restrictions on the operation of NEST, including a cap on the annual contributions an individual can make to a NEST scheme and a ban on individuals transferring existing pension pots into NEST. The cap on contributions will result in severe complexity for small and medium-sized businesses, and the ban on transfers will be disruptive both for individuals who would like to consolidate separate pension pots into their NEST scheme and for employers who would like to consolidate their occupational pension schemes. These restrictions are likely to reduce the effectiveness of NEST in addressing the market failure that is was designed to resolve, and will not serve the best interests of employers or individuals. The Government should remove these two restrictions as a matter of urgency.