Auto Enrolment Explained: Making Pensions more Accessible

By: Nektaria Stamouli
27-Apr-2010

The time for the new pensions auto enrolment scheme is fast approaching, meaning there will soon be a greater opportunity for everyone to build up a pension. Starting from October 2012, the UK's businesses will begin to join the scheme, giving millions of people the ability to save for their retirement through a pension scheme for the first time.

According to government figures, 14 million people currently get no contribution from their employer towards a pension and around 7 million people are not saving enough for their retirement. Currently, many employees fail to build up a pension because they don't make an application to join their employer's scheme. This new regime means that employees will be automatically enrolled into their employer's qualifying pension scheme without any further intervention required.

In the meanwhile, there are concerns arising from the new regime in the corporate market. Simply Finance presents what you need to keep in mind for the new scheme.

How it works for employers

Every employer has to choose the qualifying pension scheme they wish to use, which could include the National Employment Savings Trust (NEST). The employer must make auto enrolment available for all eligible employees from the time the scheme begins, and then for all new employees as soon as they become eligible. Moreover, for the purposes of safeguarding employee wellbeing, employers must meet minimum standards regarding the level of contributions they make.

According to the new requirements, from 1st October 2010, UK employers must either contribute a minimum of 3% towards NEST or a qualifying contribution scheme, or make available to the employee an alternative scheme that meets the predefined standards.  This alternative should be a 'defined benefit scheme' or similar, where the employee accrues an increasing pension based on the number of years they have been working.

Introduction of Auto Enrolment

The auto enrolment scheme will be introduced gradually, from 2012 to 2016.   Employers will be staged by size from largest to smallest, with the largest companies joining the scheme first and smaller business being given additional time to prepare. Businesses with more than 120,000 workers will be enrolled in 2012, while smaller ones will be phased in over the next three years. Start up businesses created from 2012 can start enrolling staff in 2016.

The employers' own responsibilities will also be introduced gradually with contributions starting from 1% in 2012, going to 2% in October 2016 and finally moving to the full 3% by 2017.  Further contributions are to be made by the employees on a salary sacrifice basis. These are the minimum contributions, and employers are able to put more into their employees' pension pots if they wish to do so.  

How it works for employees

The main aim of auto enrolment is to prevent employees from missing out on pensions because they fail to apply for the company scheme.  However workers can choose not to participate if they want to. If you choose to opt out of the auto enrolment during the formal opt-out period, you would simply be in the same position you would have been in originally.  However if you start the scheme and then choose to opt out at a later date, you may have to repay any contributions that your employer has made during the time you were enrolled.

As the employer contributions increase over the course of the scheme, so do the required contributions paid by you, the employee.  The percentage of your wage that you are expected to pay rises from 1% in 2012 to 3% in 2016 and 5% from 2017 onwards.  However, because you are paying this money on a salary sacrifice basis, you're making the monthly contribution out of your gross (pre-tax) earnings, and therefore paying less overall tax on your income.   This makes it a highly tax-efficient way for you to save.

Auto Enrolment concerns

Despite the benefits arising from auto enrolment, advisers who deal in the corporate market have real concerns about the changing regulation and the impact of the new scheme. According to a research by AEGON, Independent Financial Advisers (IFAs) believe that communication and education are key in the run up to auto enrolment. More specifically, two thirds of the advisers questioned think that active promotion of the pension schemes was necessary if advisers were to minimise 'levelling down' of corporate pension provision ahead of the new scheme. 'Levelling off' in this context would involve bringing all employees to a lower rate of pension contributions, leaving everyone worse off as a result.

Furthermore, 61 percent of IFAs consider that generating increased interest in non-core benefits, such as salary sacrifice, would minimise levelling down, while 53 per cent thought that this could be achieved through increased marketing activity. Most of the IFAs taking part in the survey said that the industry is responsible for educating and to actively encouraging a quality pension provision across the UK.

Neil Davies, head of corporate marketing at Aegon, said: "Employers should be encouraged to set up or maintain their more generous private pension schemes and people need encouragement to remain in these schemes and contribute more than the statutory minimum."