Firms must face up to auto-enrolment

The next few years is set to see some of the biggest changes ever made to pensions as the government plans to launch its new ‘Personal Accounts’, for all employees to be automatically enrolled into.

Due to be introduced in 2012, Personal Accounts are designed to address a perceived shortfall in the amount people are saving for their retirement, by making saving automatic. Although an employee will still have the right to opt out of such an arrangement, it is hoped the end result will be more people paying into pension schemes than is currently the case, particularly among low or middle-income earners.

While the current legislation states that all employers must offer access to such a scheme – and contribute to it along with the employee and the government – there has been concern over how this will affect the smallest employers, and the level of their contributions is expected to be phased in over two to three years from 2012, to ease the burden. Of course, it is possible the timetable could slip and smaller firms may eventually be given even longer to get their schemes up and running, or offered other concessions, particularly if there has been a change of government by then.

It will not be particularly easy for an employee to opt-out – which is not surprising, as the government does not want to encourage this. A new employee aged 22 or over must be automatically enrolled in the scheme within 14 days, and will then have 30 days in which to opt out, by requesting a form from the pension scheme or personal pension provider, and handing a completed form to their employer. (For younger employees this process will take place once they reach 22). Any contributions already made will be refunded.

The employer is free to decide on what type of pension provision they wish to make, and it may well be the case that different types of scheme – defined benefit, money purchase or personal accounts – are offered to differed grades of worker. However, the end result is still likely to be more employees being included in pension schemes than is currently the case, meaning firms would be well-advised to review their costs now.

Further complications, which are yet to be fully addressed, concern what will happen to workers with fluctuating pay (due to commission, bonuses or overtime), part-time and casual workers, and employees who work for more than one firm. In addition, workers on very low wages may see little benefit from accruing a trivial pension pot, which would probably be dwarfed by any means-tested benefits they may qualify for when they reach retirement.

The Conservatives have raised some concerns about Personal Accounts, particularly their likely effect on small businesses, and whether they will actually bring about the hoped-for increase in savings levels. Nonetheless, they also recognise the need for more people to save for their retirement, so while they may propose some changes to the scheme, they are unlikely to propose scrapping it altogether. Therefore, while there are still some uncertainties surrounding the Personal Accounts scheme, employers are likely to be facing additional pension costs one way or another very soon, and it makes sense to start planning for that now.

John Kinsella
Watson Buckle
Part of the MGI association
www.mgi-uk.com