Not all UK based companies provide their employees with a pension scheme at the moment and not all employees have access to such a fund join. Perhaps somewhat surprisingly, it is a fact that as recently as 2009 only 50 percent of UK employees belonged to an employer-sponsored retirement scheme.
Pension scheme membership varies quite widely across a range of industries. It is, for example, significantly higher than average in the public sector, along with the financial services, energy and manufacturing sectors. The retail, construction, accommodation, food and administration sectors lag behind the national average.
Employees who do not belong to a pension scheme normally face a huge ‘pension gap’ when they reach retirement age. At best, the state pension scheme only comes close to providing what they need to maintain their standard of living. To overcome this problem, various governments have, in the past, considered the possibility of ‘auto enrolment’.
2012 the cornerstone
From the beginning of 2012 the situation will change radically, as employers will then have an obligation to offer their employees a qualifying pension scheme. Total contributions to this scheme must be no less than eight percent of the employee’s earnings, of which he or she has to contribute no less than three percent.
From October 2012, every worker who earns more than £7,475 per year will automatically be enrolled into a pension scheme if they are employed by a ‘large’ company; from 2016 this will also apply to smaller companies. This differs from the current system in that, currently, employees have to ‘opt in’, while in future they will be automatically enrolled and will thus have to ‘opt out’ if they are do not wish to join.
Many existing pension schemes already qualify and the new system will most likely mean more members enrolling in them. Businesses that do not currently offer a pension fund will have the option to join the new NEST – the National Employment Savings Trust.
The purpose of NEST is to provide a low-cost pension option for low to medium income employees who have not had access to a pension fund up to now. It will also cater for those who are self-employed. This is a defined contribution pension scheme that is independently managed. The maximum yearly contribution is £3,600, which is the combined total from the employer, the employee and the government (via tax rebates).
NEST charges an initial fee of 1.8 percent on contributions and a yearly management fee of 0.3 percent, which for most workers will work out cheaper than existing direct contribution schemes. The trust will only be allowed to invest in five default funds as well as an ethical fund.
Steve Webb, the minister for pensions, said, “This Bill will radically transform the pensions landscape in this country. Millions of people, who currently have little or nothing put by for their retirement will, from 2012, find themselves enrolled in a workplace pension – setting them on the road to a more secure future.”