Employers will be required to establish a pension scheme for their staff and they must also make a contribution  to each employee's pension. These duties will start first for the largest employers, but all current employers will be required to enrol their staff in a pension scheme by 2017.
Auto-enrolment will significantly increase the numbers of people participating in workplace pension saving. The Government's design of the programme gives individuals the freedom to opt out, but they will be required to make an active decision to do so. Participation rates are expected to be high and millions of people are likely to benefit for the first time from employer contributions and tax relief from the Government. The minimum annual contribution rate (equivalent to 8% of an employee's salary) has understandably been set initially at a modest level. This approach is realistic in the short term. However, the Government should review this level in 2014 with a view to encouraging people to make higher contributions over the longer term to help them secure an income in retirement which they are more likely to regard as adequate.
Auto-enrolment was always intended to form part of a package of measures which would also include reform of the State Pensions system, to reduce the level of means-testing and enable people to see clear benefits from retirement saving. The Government should proceed with its welcome plans for State Pension reform without delay and introduce a Bill to this effect at the beginning of the 2012-13 parliamentary session.
The Government has established the National Employment Savings Trust (NEST) to offer a simple, low-cost pension scheme to employees on low to moderate earnings. NEST is required to be available to all employers who wish to use the scheme to meet their auto-enrolment requirements, including businesses that existing pension providers may consider loss-making or not commercially viable. The existence of NEST in the pensions market has increased competition and encouraged other providers to offer lower charges and has also prompted improvements in the way in which the pensions industry communicates with its customers.
The Government has placed restrictions on the operation of NEST, including a cap on the annual contributions an individual can make to a NEST scheme and a ban on individuals transferring existing pension pots into NEST. The cap on contributions will result in severe complexity for small and medium-sized businesses, and the ban on transfers will be disruptive both for individuals who would like to consolidate separate pension pots into their NEST scheme and for employers who would like to consolidate their occupational pension schemes. These restrictions are likely to reduce the effectiveness of NEST in addressing the market failure that is was designed to resolve, and will not serve the best interests of employers or individuals. The Government should remove these two restrictions as a matter of urgency.
We welcome the work that the National Association of Pension Funds is undertaking with the industry to improve transparency around fees and charges. Employers can choose either NEST or a private pension provider to deliver their auto-enrolment pension scheme, and providers must demonstrate that their schemes offer value for money to individuals. At present, the fees and charges applied by providers can be complex and it is difficult for employers and individuals to compare schemes. It is imperative that the pensions industry establishes a clear, accessible and universally-adopted model to allow the comparison of charges by the end of 2012. From 2013 onwards, if it transpires that some auto-enrolment providers are applying hidden charges, or charges that represent poor value for money, the Government should use its powers to intervene.
Auto-enrolment will impose new costs and additional administrative duties on employers. This may be particularly challenging for small employers. However, exempting small employers would create significant complexity. It would also exclude many employees of smaller companies which have not previously offered a pension scheme from workplace pension saving despite this group having always been a key target for auto-enrolment.
The Government's implementation schedule is designed to ensure that the new requirements are phased in gradually. Small employers will be the last to be phased in, and the flexibilities in the process should minimise the administrative burden on businesses. Whilst the delay to the timetable announced by the Government in November 2011 may ease the concerns of some small businesses, it will also mean that millions of employees start workplace pension saving later than anticipated. It is vital that there is no further postponement to the implementation timetable.
Communicating the reforms to the public and employers and ensuring that employers are fulfilling their duties are key to the success of auto-enrolment. The Pensions Regulator (TPR) faces a significant challenge in this respect. The Government and TPR must continue to research and monitor awareness among employers. If awareness among smaller employers remains low by 2014, TPR should consider writing to employers earlier than the currently planned 12 months in advance of their staging date.
Employers will need access to affordable and impartial guidance on choosing a workplace pension scheme for their employees. Equally, while one-to-one guidance may only be needed by a small minority of workers, it must be available for those who do need it, including help for individuals considering opting out, by telephone as well as online.
To view the full report please click on the link at the end of this release.
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