All firms to offer pensions by 2016
All employees earning at least £7,475 will be automatically enrolled into a government pension plan unless their company already offers a scheme.
The roll out of the National Employment Savings Trust (NEST) means up to eight million people will start saving into a pension for the first time.
Companies that do not offer their own pension scheme will have to enrol employees in NEST, and employees will have the chance to opt out if they want.
Auto enrolment will begin in October 2012, with the largest employers joining first and the smallest joining by September 2016.
The announcement follows an independent review by the Department of Work and Pensions titled "making auto-enrolment work", which was started in June by the new government.
Employers will be given three months' grace to enrol their staff in their own scheme or enrol them in NEST instead.
Contribution levels will be built up gradually and initially set at a minimum of 2%, of which 1% will come from the employer, increasing to a total of 8% by 2017.
Joanne Segars, chief executive of the National Association of Pension Funds, applauds the report and says the government has adopted a common-sense approach that will widen pension provision, while still keeping existing good schemes open.
However, she notes the reforms "have been a very long time coming" and says currently "a large swathe of employees has no access to a workplace pension" and this must be changed.
The amount people have to earn before they are enrolled was previously set at £5,035, but this has increased to £7,475 in line with the level income tax is paid.
Brendan Barber, TUC general secretary, says the reforms represent progress. However he argues the main losers from this increase will be part-time female workers, the least-likely group in the workforce to have a pension.
"The linking of the auto-enrolment threshold to the income tax threshold will make this worse if the coalition continues to raise basic tax allowance," he adds.
The review said that anyone earning more than £5,715 can choose to opt in and receive an employer contribution.
The National Employment Savings Trust
NEST is a government organisation that aims to provide a simple and low-cost pension scheme designed to give its members an easy way of building up retirement savings. You have one NEST retirement pot for life, whether you change jobs, work for more than one employer at the same time, or leave employment. A NEST scheme won’t allow transfers in and out. From 2012, all employees will be obliged to join workplace pension schemes unless they actively opt out and NEST will be the default fund for those employers who do not create comparable alternative arrangements. It will be phased in from 2012 and all employers will be required to contribute 3% by 2017.