THIS year will see the introduction of the biggest change in workplace pensions ever. When auto enrolment becomes a reality between 2012 and 2018, virtually every household in the land will be touched by its implementation.
Since 1948 the average UK household savings ratio has been around 6 per cent of income compared to European averages typically of twice that, and many millions of UK workers have no retirement savings whatsoever. It is one of the government’s aims to get our savings ratio to 12 per cent by 2020 as the negative implications of rising public-sector debt, an ageing population and increasing healthcare, long-term care and state pension costs coupled with contracting tax revenues mean that the UK’s economic outlook is unsustainable.
Starting in October with our biggest affected employers, the big four supermarkets, and then moving forward through to the very smallest employers, each company must provide a workplace pension to their staff aged between 22 and state pension age. Employers must contribute to employees’ pensions and deduct contributions at set levels from their pay. Employees may opt-out of the plan of their own choice but it is an offence for an employer to encourage this.
Contributions start at low levels and by 2018 will be at or around
4 per cent of employees’ core pay with their employer adding an extra 3 per cent to this and the government adding 1 per cent through tax relief. This is a great foundation for retirement savings but most people should try to put more away if possible, especially if they earn above-average salaries. As an example, a 22-year-old saving for 46 years at the 8 per cent level may only receive a pension of some £500 per month in today’s terms and those who are closer to retirement will get considerably less.
AWD Chase de Vere firmly believes that tomorrow is worth saving for and that auto enrolment is a great starting point. However, to get an acceptable pension in their retirement someone in their mid-20s now should be saving about 15 per cent of their pay for retirement and those who are older should be saving considerably more.
It is not just employees who are affected by the introduction of auto enrolment. Employers must pay in to members’ accounts and ensure they have in place appropriate systems, procedures and infrastructure to manage initial and ongoing compliance with their new duties. This is perhaps easier for the likes of Tesco than for a typical employer that may not have access to large IT, personnel and payroll departments, but still have to deliver a fully functioning auto enrolment solution for their people.
Our view is that businesses should start planning now. The size of an auto enrolment project should not be underestimated and it makes sense to take professional advice early to ensure a smooth migration into the new operating world.
We work with many employers and typical first steps for them include: establishing their staging date; modelling the cost and profit implications; understanding wider business issues such as payroll capability and impacts on ongoing contracts; determining if existing pension plans will meet their new obligations; educating their workforces as auto enrolment becomes increasingly high profile; creating high-level roadmaps to identify and manage the diverse tasks that are likely to need doing.
Auto enrolment is crucial in providing financial security in retirement for generations to come. There is still work to be done by the government, employers and financial institutions, but all should now know “What, When and Why”.
• Graeme Robertson is a principal consultant and chartered financial planner at AWD Chase de Vere