Workplace pension scheme crucial as government plans shake-up

THE coalition government appears to have grasped the need for decisive action to tackle the UK's long-term savings crisis. Now it must set out how it plans to do it and the coming weeks will give us a better idea of its thinking.

It acted quickly in the summer by kick-starting reviews on everything from the abolition of the default retirement age to accelerating the increase in the state pension age. The savings industry has been reporting back to the government on its proposals and it is expected to set out the shape of its reforms over the coming weeks, with several announcements expected this month.

Industry experts were given until Thursday to submit their views on workplace pensions reform, and figures published on the eve of the deadline spelt out just how important it is that the government gets this absolutely right. The reform centres on plans for automatic enrolment in workplace pension schemes from 2012 that must succeed or it risks undermining retirement savings for years to come.

Under plans set out by the Labour government, workers will from 2012 be automatically enrolled into their employer's existing pension scheme or the National Employee Savings Trust (Nest), with the right to opt out. Workers will put at least 5 per cent of their salary into the scheme, with employers adding 3 per cent.

The idea is to ensure low income workers in particular, who are not already saving into a workplace pension - perhaps because their employer does not offer one - have access to an affordable scheme that allows them to build up a decent retirement pot, cutting the burden on the state. Changes being mooted include an increase in the minimum earnings at which employees should be enrolled and an option for smaller employers to opt out of the scheme.

Experts warn that watering down the plans would be disastrous for long-term pension reform and their argument is supported by figures out this week showing the extent to which pensioners rely on savings built up in the workplace.

The Office for National Statistics (ONS) revealed that in the last decade alone, the proportion of pensioner income provided by the state pension has dropped from 52 to 43 per cent. The proportion of that income that comes from working has almost doubled over the period.

The increased contribution by workplace pensions to retirement incomes has pushed pensioner incomes up faster than average earnings since the mid-1990s, with the greater reliance on occupational pensions offsetting lower state payments.

But this means that while the incomes of retired people with decent private and workplace pensions have improved, those without are being left behind.

According to the ONS, the top 20 per cent of pensioner households by income earn an average of 755 a week, compared with 197 for couples in the bottom fifth of incomes.The most obvious way to boost retirement incomes is to improve the state pension, but these figures show the extent to which the gap between the wealthiest and poorest pensioners is caused by a lack of private and workplace pension saving among the latter.

This is where auto-enrolment comes in - ensuring that every worker is enrolled in an occupation pension scheme that they have to opt out of if they wish, will, if the scheme is successful, help redress this imbalance. These figures drive home why auto-enrolment cannot be allowed to fail.