Pensions Overhaul Necessary to Avoid Disaster, Says Report
A new report has warned of a pension “iceberg” after finding less than half of Britain’s employees are contributing to a workplace pension scheme. Other findings, by the National Association of Pension Funds, showed around a third of employees work for a company that does not provide any kind of pension at all. With other factors, such as high profile pension wind ups, eroding wider confidence in workplace schemes, the reports offer a stark vision of a future in which many people face poverty into retirement and old age.
The findings come against the backdrop of a concerted government effort to overhaul workplace pensions by introducing an auto-enrolment scheme in which employees are automatically entered into a pension to which employers also contribute. The ‘flagship’ scheme has been welcomed by unions and ministers alike, and is hoped will prompt a huge upsurge in the number of people contributing financially towards their retirement. According to Pensions Minister, Steve Webb, up to 10 million workers in Britain will be immediately eligible for the auto-enrolment scheme, which has been introduced to larger companies with over 120,000 staff. Smaller firms have a deadline of 2018 to implement auto-enrolment for their own employees. Auto-enrolment is not mandatory, but with the process now simplified and with the incentive of government and employer contributions to shore up payments, the NAPF’s chief executive, Joanne Seger, is encouraging people to “stick with” their new pensions. Workers leaving an auto-enrolment pension early risk losing out financially: pension tax breaks depend on contributions over a period of time, while employer contributions are, Seger is keen to point out, essentially “free money”.
Auto-enrolment to reverse pension ‘crisis’
With Britain already facing a crisis of pension wind ups, underfunding and insolvency, Seger believes the new policy is just the kind of radical reform the United Kingdom needs to cope with the increased pressure which will be put upon the state as more people hit retirement age and continue to live longer.
“The UK is drifting towards an iceberg when it comes to paying for its old age.” said Seger “Things have got to change. Less than half the workforce is saving into a pension and, without auto-enrolment, millions would end up scraping by on the state pension alone.” It is hoped the new scheme (first put forward in the first four months of Gordon Brown’s premiership) will reverse the declining trend of retirement saving by appealing to those who traditionally make little or no preparation for old age: the young, the low-income and small business employees.
Other options are available, says IoD
Some business owners have expressed concerns that auto-enrolment and its mandatory costs are not the right way to go at a time when businesses are only just emerging from one of the worst economic downturns in history.
The Institute of Director’s Malcolm Small warns many businesses aren’t aware of their responsibilities to the new scheme. Small points out that alternatives for retirement saving, including “ISAs, life insurance policies and investment bonds” already exist – meaning many employees may not wish to direct earnings towards an automatic pension.
The regulations for auto-enrolment pensions may also be unclear to some businesses already offering pension schemes – and believe they are compliant with the new policy. Understanding the staging and phasing-in of auto-enrolment will be essential for businesses seeking to avoid penalties. Businesses which leave preparations to the last minute to make the auto-enrolment are likely to face problems.
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