Over the next few weeks your employees will probably be hearing a lot about whether they should join your pension scheme. This is because October 1st 2012 marks a pivotal moment in the history of UK pensions – the start of a programme of automatic enrolment that will see up to 12 million employees put into pension schemes for the very first time.
First to have to comply will be the biggest employers in the land. From the beginning of next month very big employers will have to automatically enrol eligible employees into a pension scheme, pay contributions on their behalf and deduct contributions from their employees’ salary.
Because automatic enrolment is such a massive change in the employer/employee relationship we can expect its arrival to spark many column inches in the newspapers, as well as pieces on TV and on the radio, all asking whether or not it is a good idea. The media will be asking whether individuals should stay in schemes or opt out, whether it pays to save and whether the pensions people are being enrolled into are good value.
We have had workplace pensions for years but the government’s pensions automatic enrolment policy is particularly controversial because it changes the way people interact with schemes. In the past individuals have had to opt into schemes if they wanted to take part. Automatic enrolment puts them into schemes from the outset, and gives them the freedom to opt out if they want to. The idea is to make the ‘do nothing’ position the one that leads to the good outcome of building up a pension pot, whereas previously doing nothing meant not being a member of the scheme and retiring without a pension.
It is also controversial because it involves taking money out of employees’ pay packets without their actual consent, even if they can choose to opt out again.
Employees will make their own decisions as to whether they stay enrolled in schemes or opt out. But much of their thinking will be informed by the media’s attitude to the policy over the coming weeks. The early signs are that most national newspapers are behind the policy so far.
Newspapers will explain the fact that the employer contributes ‘free money’ to the employee’s pot, and that contributions come out of gross earnings, meaning employees save the tax they would have paid.
Some papers may criticise schemes for not giving enough income in retirement or complain about the high charges on some plans.
There is no escaping the fact that you need a big defined contribution pension pot to secure a decent income in retirement. So it is important to be able to reassure your employees that the scheme you have selected for them combines low charges and excellent investment performance. That way they can be confident that more of the money they put into the plan goes towards building a healthy pension and does not disappear in fees and poor investment decisions.