Jeff Prestridge: Run with the ball on auto-enrolment

Slowly but surely, we are getting ever closer to a new dawn for pensions. We are approaching the world of auto-enrolment where most employees of all employers, small companies as well as large stock market-listed concerns, will be automatically signed up to participate in their company pension scheme. If a workplace pension is not available, they will be signed up (straitjacketed, some would say) into the new National Employment Savings Trust.

Start date for this exciting ‘new pensions world’ is October 2012 when the country’s largest employers (those with 120,000 or more PAYE employees) will be required to enrol employees automatically into a pension scheme that meets minimum quality requirements. Thereafter, companies will be pushed into the new auto-enrolment world at one of 42 ‘staging dates’ between November 2012 and 2016.

Workers who will be eligible for pensions auto-enrolment will be those who are aged between 22 and the state pension age and who have sufficient ‘qualifying earnings’ (£7475 a year in 2011/2012 terms). To begin with, the minimum pension contribution will be 2 per cent of qualifying earnings (at least 1 per cent coming from the employer) but this will rise by October 2017 to 8 per cent (with at least 3 per cent coming from the employer). Qualifying earnings are broadly gross earnings between £5035 and £33,540 (in 2006/2007 terms).

With less than a year to go, the appetite for this brave new pension world seems somewhat mute although I must confess that my wife surprised me when she said that her employer’s ‘staging date’ was September 2015. Admittedly, Sue works in payroll but I was impressed that she was aware of the impending changes to workplace pensions.

According to Standard Life, only 7 per cent of ‘larger’ firms have so far made auto-enrolment plans, not surprising in light of the fact that most companies currently have more important matters on their minds – such as surviving the awful state of the British economy.

As for the main objective of auto-enrolment, namely to kick start the savings habit, it could struggle to be fulfilled. If the latest data from the Association of Consulting Actuaries is to be believed, between 12 and 17 per cent of employees with larger employers are looking to opt out of the workplace pensions after being auto-enrolled. Smaller employers say they are expecting between 33 per cent and 39 per cent of employees to opt out.

So, could auto-enrolment be a damp squib? Well, the department for work and pensions certainly does not think so (but then it, more than anyone else, needs to be bullish about what auto-enrolment will do to the long-term savings habit). The department for work and pensions estimates that pension contributions will increase by between £6bn and £10bn a year once auto-enrolment is fully on board in 2016. Furthermore, between 5m and 8m new savers will be introduced to the world of pensions as a result of auto-enrolment.