It is now just over a year since the UK government launched its auto-enrolment workplace pension scheme. Initially rolled out to larger companies such as Tesco, it will soon be extended to include SMEs over the next five years. What have we learnt from the first twelve months? Is the scheme a force for good? Or superfluous bureaucracy and a strain on small business?
Workplace pension scheme
The scheme automatically enrols employees into a pension scheme, either the company’s own, or with the government sponsored National Employment Savings Trust (NEST), currently to the tune of 2% of salary (0.8% employee contributed, 1% employer, 0.2% tax relief). The size of contribution is set to increase over the next five years until it reaches 8%, including employer contributions and tax relief.
Until now the scheme has only applied to around 1,000 of the UK’s largest firms, but is set to roll out to all businesses in the next five years. Employees are entitled to opt out, receiving a refund for their contribution if done so within the first month of enrolment.
A ‘quiet revolution’
So far the scheme has been hailed a success. 1.6 million workers have been enrolled into the scheme, with only a 9% opt out rate. It should be noted these figures don’t include those that missed the one month cut-off date and may have opted out in the second or third month (or later). That said, it’s still markedly lower than the expected, with the government previously expecting around a third to leave the scheme.
Referring to the number of people now saving for retirement thanks to the scheme, pensions minister Steve Webb said “over the past year we have instigated a quiet revolution that has heralded the biggest change to pensions in a century“.
The small business problem
However, the real test of the scheme’s feasability will come as it extends to SMEs. As Jamie Jenkins, head of workplace strategy at Standard Life put it: “SMEs are central to the UK economy, and to the success of auto enrolment, accounting for 99% of UK businesses and employing over 14 million people however, many lack the resources of larger businesses.”
This point is crucial. According to the Centre for Economic and Business Research (CEBR), the set-up costs could total up to £28,300 per employer; which is a stretch for already under-resourced small businesses. That doesn’t include ongoing administrative and payment costs which will add up to much more in the long-term, alongside the estimated 103 man hours needed for dealing with auto-enrolment. Employers tempted to ignore the scheme face fines of up to £10,000 per day.
Factor in the strain on providers, advisers and insurance companies due to the far greater number of participants, and the potential for logistical nightmares inflates daily.
Defusing the pension timebomb?
The deadly mixture of an ageing population, longer life expectancy, rising care costs and a spend-not-save culture has brewed a potentially disastrous problem in how to pay for retirement, on both an individual and national level. Assuming everything goes smoothly, and SMEs don’t find the financial burden an undue strain, will it defuse this pension timebomb?
Taken in this context, near-forcing people to save for their retirement can only be a good thing. And it comes at a time when attitudes towards putting money aside appear to be softening. NEST’s own survey of people yet to be placed in a workplace pension found that 61% planned on staying in the scheme once enrolled, up from 47% when asked the same question in 2011. The study also found that 57% would never spend money as freely as before the financial crisis, up from 48% a year ago and 43% in 2010.
If the least the scheme does is encourage this nascent culture of financial responsibility and forward planning then it will be worth applauding.
But there are problems. Many pensions experts say even the 8% of salary contributions once the scheme is fully rolled out is not nearly enough. The problem is particularly pronounced for older workers enrolling now. The savings barely add up, but might be just enough to push them over the threshold for means tested benefits, meaning their contributions – which they could otherwise spend now – are effectively worthless.
There is also a danger that the government sponsored, near-mandatory scheme will be assumed to be enough, and discourage people from saving elsewhere.
If employees feel they’re doing all they need by not opting out of the plan then that will clearly be a bad thing. Aside from the need to save substantially more, pensions no longer seem the safe haven they once did. Near-constant government meddling, even active raiding, means the value of pensions can drastically change at the drop of a hat; a particular worry if your money is with NEST, the state pension provider. Better to have savings elsewhere – in ISAs or property say – on top of and in combination with a pension. Some would argue instead of one. The value of tax savings and eligibility to invest in an ISA or pension will depend on individual circumstances and all tax rules may change in the future.
So is auto-enrolment a good thing? Yes and no. Getting people who weren’t saving before into a pension scheme certainly is. Its role in encouraging savings culture certainly is. But the strain on small business, its inadequate contribution size and potential for discouraging other savings are all issues that sorely need addressing.
It will be a few decades before the first generation of workers who have been contributing to a pension their entire careers reach retirement. In the end, only time will tell.
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