Will the new auto-enrolment pension scheme be a success?

Published by on 03 October 2012.
Last updated on 05 December 2012

Question mark

For far too long the UK has been able to get away with one of the least generous state pension schemes in Europe.

One of the reasons for this was the substantial defined benefit pensions available in the private sector that provided the cake for pensioners, against which the state pension was merely a top up, the icing on the cake.
The demise of defined benefit pension schemes in the UK and their replacement by far less generous defined contribution arrangements have brought the inadequate state pension system into the limelight. The cake has disappeared and pensioners have no hope of adequately surviving on the icing.
Statistics show us that in my lifetime one in four people in the UK will be over the age of 65. Yet half the workforce is currently not building up any pension entitlement beyond the state pension.
That is why the roll out of automatic enrolment which began this week is so important to the future well-being of pensioners and the public purse in the UK. 
Large numbers of staff working for the UK’s largest employers and who are not already in a workplace pension scheme will begin to be automatically enrolled into a pension scheme.
Eventually all those who work in the UK, are aged 22 and under state pension age, are not already in a scheme and who earn more than £8,105 per year will be automatically enrolled.


The upbeat approach of the television adverts fronted by a number of 'stars' masked the fact that making automatic enrolment successful will be an uphill struggle. But then those of you who watched the Ryder Cup will know anything is possible.
Minimum contributions from both employers and employees into automatic enrolment schemes start at almost nothing and even by 2018 when they reach the full minimum amount of the equivalent of 8% of a worker's earnings will only see £1,154.88 per year go into the pension pot of a worker earning £20,000 a year.
One of the major problems facing automatic enrolment is that this is simply not enough. A pension pot has to be used to buy an annuity (pension) in due course and annuity rates are at an all-time low. Workers on £20,000 a year saving for decades are going to be lucky to see £100 a week during retirement.
Moreover reform of the state pension system, and the introduction of a flat-rate pension above the means testing level, is a must unless automatic enrolment is going to snatch defeat from the jaws of victory as the Americans did at the Medinah Country Club.
Unless those workers on £20,000 are going to get some additional pension in return (as opposed to simply having their means-tested benefits reduced) it is not worth them remaining in their automatic enrolment scheme and they will opt out in their droves.
Furthermore if members remain in automatic enrolment schemes only to find they have paid out for nothing on retirement this could end up a pensions mis-selling scandal on a scale not yet imagined.
The pensions minister must find a way to overcome the doubts of the prime minister with his flagship pensions reform, despite his soon to be published white paper turning in his own words 'minty green', as colleagues start having cold feet.
The success of automatic enrolment is vital to the ever growing number of pensioners in the UK, but let us give it the impetus to succeed by being honest about the scale of contributions that will be needed to make this a success backed with reform of the state system.
Momentum is everything at this time as the Europeans proved in the Ryder Cup. Like Martin Kaymer, the pensions minister must keep his nerve when the pressure is at his highest if glory is to come his way.
Fraser Smart is the managing director of Buck Consultants
This article first appeared on our sister website Money Observer

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