“We’re all in!” - Biggest change in pensions for over a century
- Published on Monday, 01 October 2012 14:20
- Written by Steve Webb MP
With only one in three private sector workers paying into a workplace pension, and 11 million of us not saving enough for retirement, we all need to save more or face a real economic struggle in our old age
The fact is people are living longer but saving less – pension saving is at its lowest since records began. That's why I'm introducing the biggest shake-up in UK pensions for over a hundred years in October: automatic enrolment.
And it's going to be a truly radical social change. Up to 11 million people will be eligible for automatic enrolment between now and 2018. Of those, 6 to 9 million will be newly saving or saving more in all forms of workplace pension schemes. That means millions more saving for their retirement for the first time.
I believe that automatic enrolment can transform Britain into a nation of savers, increasing pension saving by almost £11 billion a year when it is fully introduced. An extra 600,000 people will be saving for their retirement that weren't by Christmas alone.
So how will it work? From October, the largest employers with more than 120,000 employees will be required by law to automatically enrol all eligible staff into a workplace pension.
Employees who are enrolled will start by paying a minimum 1% of their average earnings into a pension, and their employer will make a contribution. The government will also put in tax relief of 1%, bringing the initial minimum contribution to 4%. Only by 2018 will minimum contributions have reached 8%, with 4% from the individual, 3% from the employer, and 1% tax relief.
And what about the impact on businesses? I recognise that businesses and smaller firms in particular, are currently operating in very difficult economic conditions. That's why we took the decision to give small businesses more time to prepare, and the reforms will be brought in gradually over the next five years. The largest employers, who are most likely to have established pension arrangements, will go first.
It's also why the level of pension contributions is also being gradually introduced to help employers and individuals adjust to the costs of the reforms.
The Pensions Regulator is guiding employers through the process so that they understand what they need to do to comply with their new duties, and making sure that they have all the information they need to explain the benefits of a workplace pension to their staff.
For too long pensions have been the preserve of the few. And my overriding priority is to make sure every pound that savers put aside is turned into the maximum possible amount of pension.
Under automatic enrolment, while employers are able to choose the pension scheme they want to use, the scheme must meet certain high-quality criteria.
Automatic enrolment is also providing a catalyst for change in the wider pensions landscape. Many more people saving means more small pension pots in the system, which are inefficient for savers and costly to administer.
It is difficult for people to transfer their pensions throughout their careers, leaving their pots stranded or lost. To help people consolidate their retirement savings into one big pot we will introduce the automatic transfer of pension pots when people move jobs, and we are working with the pensions industry on this.
To help people build up the best possible amount of pension we are also watching the issue of charges very closely. I welcome the efforts by industry to provide clearer information on charges and costs. And if further measures are needed to clamp down on charges, then we will not hesitate to take them.
In these ways automatic enrolment is helping to bring about a massive transformation in pensions, bringing millions into saving and driving wider reform.
Automatic enrolment is the best thing to happen in pensions for a very long time. It is good for Britain, good for individuals; and good for growth.