22 Feb 2012 | Capital Hill

Capital Hill on... workplace pension reforms 

WORKPLACE pension provision will soon become compulsory, with the government making it mandatory for employers and employees to contribute towards the nation’s retirement.

A total of 8% of each employee’s wages will eventually be paid into a pension fund, subject to certain earnings limits: employers will have to contribute 3% of employees’ wages, while employees will have to contribute 4% themselves. An additional 1% will be made up in the form of tax relief from the government. 

The move spells significant changes in pension saving for millions of British workers. Martin Palmer, head of corporate benefits marketing at insurer Friends Life, said: “For many workers who don’t currently save anything towards retirement auto-enrolment will mean a huge change. “Just as employers are starting to prepare for the introduction of the reforms, employees should start thinking about their saving habits and how the changes might affect them.”  

So, exactly what will happen when? And what do these reforms mean for today’s retirement savers?  

Capital Hill takes a look at the reforms and gives some top tips for people looking to pave the way to a rosy retirement...

What will happen when?  

Under what’s known as ‘auto-enrolment’, new government legislation will require all employers to automatically sign up employees aged between 22 and the state pension age into a pension scheme, starting in 2012.

Businesses with 50 employees and fewer will have an extra year to prepare for the new rules following a delay announced late last year: they will now have to comply from 2015 rather than 2014.  

A further delay announced in January means that minimum contributions will not be fully phased in until October 2018 – almost 16 years after the Pensions Commission was asked to investigate under-saving for retirement, according to professional services company Towers Watson.  

Senior consultant Rudi Smith said: “The government is saying there will be no further delays regardless of what happens to the economy, and employers will have to plan on this basis.”

How much will I have to pay in?  

The amount enrolled employees will be asked to contribute to a pension will increase gradually, starting at 1% and rising to 5% of earnings (after tax relief has been added) from 2017.  

The Department for Work and Pensions (DWP) is finalising details for the earning thresholds that will be used for the first wave of auto-enrolment. It has proposed that the earnings trigger above which all employees must be auto-enrolled should be set at £8,105, as this will tie in with the personal allowance threshold for paying tax in 2012-13.  

Once an employee’s earnings exceed this trigger, their auto-enrolment minimum pension contributions will be based on all their earnings above a minimum threshold. The DWP proposes that contributions are based on all earnings above the lower earnings limit of £5,564, and that the upper ceiling for calculating minimum contributions should be based on a figure of £39,853 – the original ceiling proposed in the Pensions Act 2008, revalued in line with average earnings.  

Financial adviser Hargreaves Lansdown believes the proposed trigger and minimum threshold tie in nicely with established tax and National Insurance (NI) thresholds, but called for the ceiling to be aligned with the upper earnings limit for NI – putting it at £42,475 for the 2012-13 tax year.  

Head of pensions research Tom McPhail said: “The rules and thresholds should be kept as simple as possible. We know that the 8% minimum contributions will be inadequate to buy most people a decent pension; for this reason we believe the government should be looking for ways to increase contributions, rather than artificially reducing them.”

How will the rules affect my employer?  

Auto-enrolment is expected to increase participation in workplace pension schemes – and therefore increase employers’ pension costs.  

Businesses can decide the type of qualifying pension scheme they wish to use, including the government’s new National Employee Saving Trust (or ‘NEST’ for short).
Some large employers are aiming to enrol all eligible staff into their existing pension scheme at the higher contributions rates which they currently make available on an opt-in basis, according to Towers Watson.

Others intend to divide their workforce into different groups to keep costs down. For example, they might provide a different level of pension provision for short-term employees, or enrol employees who they expect to be less motivated by pensions at a lower contribution rate with the option of trading up.

When will my employer have to comply?  

The law comes into force for employers between October 2012 and October 2016, with the exact auto-enrolment staging date for each employer determined by company size.

Larger employers, with 120,000 employees or more, will be phased in first, commencing on 1 October 2012. Firms with 250-2,999 employees will have to start complying from August 2013, while smaller employers will have to start complying from May 2015, instead of April 2014 previously.

Should I hang fire until then?  

By all means find out from your employer when it expects to start automatically enrolling staff into a pension scheme, but don’t delay saving in the meantime.  

You can contribute to more than one pension pot, subject to annual limits, and the earlier you start saving, the easier it will be on your pocket.

“The best thing consumers could do is have a good think about how much income they’d like in retirement and use one of the many online calculators to understand how much they need to save each month to achieve this and what impact it will have on their planned retirement date,” said Palmer.

"Positive action, even if just small sacrifices here and there, really could make all the difference down the line.”

To find out how much you’ll need to save for the retirement you desire, try pensioncalculator.org or pensioncalculator.com.

Where should I invest?

Whether you’re saving in a workplace or personal pension, if you have a long time until retirement you can afford to take more risk with your retirement pot – giving it the best possible chance to grow into a tidy sum.  

Patrick Connolly, head of communications at AWD Chase de Vere, the independent financial adviser, said: “If you take more investment risk by investing in assets such as shares then in theory you should get better returns in the long-term than investing in safer assets, such as cash and fixed interest.  

“However, if you’re investing over a shorter period, say less than ten years, then you shouldn’t take too much risk because if the value of your investments fall in value you may not have enough time to claw back any losses.”

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This article contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.

Jennifer Hill
Jennifer is an award-winning British financial journalist. She recently left The Sunday Times, where she was deputy Money editor, to set up her own company, mediahill Ltd. She is a previous personal finance correspondent of Reuters, the global news service, and personal finance editor of The Scotsman newspaper.

She has won or been shortlisted for six Headlinemoney awards, the ‘Oscars’ of personal finance journalism in the UK. She has also scooped or been nominated for accolades from the Association of Investment Companies, Ignis Asset Management, the Association of British Insurers and the British Insurance Brokers’ Association.