A catalyst for change

The biggest change in pen­sions in over a hun­dred years is almost under­way.

From Octo­ber 1, mil­lions of peo­ple will become pen­sion savers for the first time or start sav­ing more as firms begin to enrol their staff into work­place schemes.

Up to 11 mil­lion peo­ple are expect­ed to be eli­gi­ble for auto­mat­ic enrol­ment, with six to nine mil­lion new­ly sav­ing or sav­ing more in all forms of work­place pen­sion schemes.

Pen­sion sav­ing in the pri­vate sec­tor is at a record low across all indus­tries, with only one in three pri­vate-sec­tor work­ers pay­ing into a work­place pen­sion. And 11 mil­lion of us are not sav­ing enough for our retire­ment.

Auto­mat­ic enrol­ment will put an end to this and trans­form Britain into a nation of savers, increas­ing pen­sion sav­ing by almost £11 bil­lion a year when it is ful­ly intro­duced.

And auto­mat­ic enrol­ment means that instead of choos­ing whether to join a work­place pen­sion scheme, indi­vid­u­als will have to active­ly decide to opt out. The incen­tive to save is rein­forced by a manda­to­ry min­i­mum employ­er con­tri­bu­tion.

I recog­nise that busi­ness, and small­er firms in par­tic­u­lar, are cur­rent­ly oper­at­ing in very dif­fi­cult eco­nom­ic con­di­tions. That is 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.

The lev­el of pen­sion con­tri­bu­tions will also be intro­duced grad­u­al­ly to help employ­ers and indi­vid­u­als adjust to the costs of the reforms. No one will have to pay the full min­i­mum con­tri­bu­tion of 8 per cent until Octo­ber 2018.  The min­i­mum con­tri­bu­tion is made up of 3 per cent from the employ­er, 4 per cent from the indi­vid­ual and 1 per cent in tax relief.

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 work­place pen­sion to their staff. 

Up to 11 mil­lion peo­ple are expect­ed to be eli­gi­ble for auto­mat­ic enrol­ment

The Depart­ment for Work and Pen­sions (DWP) nation­al cam­paign will help raise aware­ness of auto­mat­ic enrol­ment, includ­ing tele­vi­sion adver­tis­ing from lat­er this month.

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. And 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. We will con­tin­ue to work with the pen­sions indus­try on more detailed pro­pos­als for 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 the 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. And we want to ensure that peo­ple shop around exten­sive­ly when they turn their pen­sion fund into an annu­ity.

In all 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.

Lib­er­al Demo­c­rat Pen­sions Min­is­ter Steve Webb worked at the Insti­tute of Fis­cal Stud­ies and was appoint­ed Pro­fes­sor of Social Pol­i­cy at Bath Uni­ver­si­ty. 

The biggest change in pensions in over a hundred years is almost underway.