2012 will see the biggest shake-up in pensions this century with the advent of personal accounts. Harry Scott analyses what this involves and why employers may not be dancing in the streets.
If the government really wanted to ensure that people saved for their old age, it would increase national insurance (NI) contributions and direct the extra cash either into its new Personal Accounts scheme or existing pension arrangements. It hasn't increased NI contributions because it thinks this would be viewed as increasing the tax burden, and so would be politically unacceptable.
Instead, it proposes Personal Accounts, which will be a funded industry-wide defined contribution occupational pension scheme. This will mean automatic enrolment for staff from their first day of employment. The government calls this "soft compulsion".
The scheme's remit is wide: it will apply to staff aged between 22 and state pension age, with those under 22 excluded. The government justifies this by saying that the youngest employees change jobs more frequently – if they can find one. Automatic enrolment also applies to workers, as well as employees, and in particular to agency workers. The legislation defines employees and workers collectively as "jobholders".
Jobholders will contribute 4% of earnings between £5,035 and £33,540 a year, while employers will contribute 3% on the same band of earnings. The effect of excluding the first £5,035 of earnings is to reduce the effective rate of employer contribution on total pay. To take an easy example, the effective rate of contribution in relation to a jobholder earning £10,000 a year will be only 1.5% of gross pay.
There will also be a transitional provision whereby the employer contribution will start at 1% of earnings in the first year, moving up to 2% in the second year, and 3% from the third year onwards.
For their part, jobholders will be able to opt out of the scheme, but if they do so they will be auto-enrolled back in again every three years. The low paid are most likely to opt out, simply because they will need the money to meet their current commitments – which is ironic because the low paid are Personal Accounts' target sector.
Employers may not like it, but it will be illegal for them to enc