Pensions: Auto enrolment starts, but it won’t be enough warns minister

Possibly the biggest change to the pension provision of millions started this week, although at least one government minister warned, that the auto enrolment scheme alone, will not be sufficient to maintain most people’s current standard of living in retirement.

Auto enrolment starts

The process of automatically enrolling millions of employees into work place pensions started this week with the UK’s largest firms.

Workers will have deductions made directly from their wages, which will then be paid into a work place pension; employer contributions and tax-relief will top up the payments made by employees.

Initially, only the UK’s largest employers, with more than 120,000 staff, will have to automatically enrol their employees, however the program will be rolled out to all firms by April 2017.

Employees do have the option to opt out of the scheme; although they will be periodically re enrolled and it is hoped that the majority of employees continue to make contributions, in an effort to improve their retirement provision, which for many people is woefully inadequate and often reliant solely on the State Pension.

Auto enrolment not enough

However, speaking to the BBC on Monday, Steve Webb, the Pensions Minister, said that for some people on average salaries, making the maximum contribution under the auto enrolment scheme would not build up enough money to maintain their current standard of living when they retire.

The maximum contribution that can be made under the auto enrolment rules is somewhat complicated, gradually rising to 8% of earnings between £5,564 and £42,475, otherwise known as ‘qualifying earnings’.

The 8% is made up of an employee contribution of 4%, 3% from the employer and 1% in tax relief.

In an interview on the BBC’s Today program Mr Webb said: “If you are on something like average earnings then the 8% we’re talking about won’t allow you to maintain your standard of living in retirement.”

He continued: “Low wage people, because they are already getting a state pension of say £7,000 a year, a bit of private pension saving on top actually gets them close to the standard of living they currently have. So it’s the higher earners who probably ought to be going beyond the minimum.”

State pension concerns

There are also concerns that some people could simply be building up a pension under the auto enrolment scheme, which will then reduce the level of state benefits they can claim in retirement.

At present pensioners can claim a variety of means tested top up payments to supplement their State Pension. The coalition government had been proposing a flat rate State Pension, payable to all, which would have meant people making their own provision, for example via the auto enrolment scheme, would be doing so in the knowledge that they are not simply saving to reduce the benefits to which they are entitled.

However, it is now reported that the government are rethinking the flat rate State Pension proposals, seemingly nervous that many of the losers are core Conservative voters.

Many pension experts are warning that the take up of auto enrolment could be damaged if the government fail to introduce the flat rate State Pension as originally planned.

Who will be automatically enrolled?

Once it is an employer’s ‘turn’ to commence auto enrolment, all employees who are not already in a work place pension, who are over the age of 22 and earn more than £8,105 per year will be enrolled into the scheme, with contributions deducted each month from their wages.