Government heralds pensions revolution
The Government is heralding the biggest change in pensions for over a hundred years – automatic enrolment – which starts today.
Starting with the largest firms in October, employers will now be required by law to pay into a workplace pension for staff who do not opt out.
By the end of the year, around 600,000 more people in the UK will be saving into a workplace pension and by May 2014 about 4.3 million people will be saving for their old age.
Steve Webb, Minister for Pensions, said: "We are proud to be introducing this truly historic change, which will radically alter the way we save for our old age, and see millions more people putting something aside for the future.
"From October, we will start seeing large firms, such as banks and big supermarkets, automatically enrolling their staff into a workplace pension. Between now and 2018, more and more employers will come on stream - right down to the smallest ones.
"If we can get between 6 and 9 million more people saving in a pension by the time all employers are in, that’s a genuine savings revolution."
The Government says around 11 million people are not saving enough to achieve the pension income they are likely to want or expect in retirement, and less than 1 in 3 adults are contributing to a pension, while people are on average living longer.
It cites evidence from the Department for Work and Pensions suggests that, once automatically enrolled, less than one-third will take the active decision to opt-out.
The employer is compelled to provide a minimum level of contributions to the scheme. Minimum contributions start at 1% and by October 2018 build to 4% for employees which equates to 8% overall (employer at 3%, employee at 4%, and tax relief at 1% combined) of a band of earnings.
The Institute for Fiscal Studies says: "While there are good reasons to expect pension coverage to increase, the impact on overall saving is less clear. This is for a number of reasons. First, evidence suggests that defaulting employees into pensions leads to more individuals choosing to contribute the default amount, perhaps because individuals decide not to bother reviewing this level of contribution in the belief that the default amount has, in some sense, been recommended. While this would lead to an increase in pension saving among those who would not otherwise have saved in a private pension, it would lead to a reduction in saving among those who would otherwise have chosen to save more than the default amount."
It is also worried that people might cut back on other forms of saving to fund their pension contributions or be able to pay off debts less quickly. And it says the cost of increased employer contributions and other additional administrative costs will need to be financed from a combination of lower wages, higher prices or lower profits. "All of these could depress saving," it comments.