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Pensions: Nest won't work unless people are forced to save

If the government is hoping that the introduction of the National Employment Savings Scheme (Nest) next year will reduce the government’s spending on the elderly, it will have to think again.

Pensions: Nest won't work unless people are forced to save

If the government is hoping that the introduction of Nest (National Employment Savings Scheme) next year will eventually reduce the government’s spending on the elderly and ensure that people are properly provided for in retirement, it will have to think again.

With less than 50% of employees members of their company’s occupational pension scheme in some companies, the introduction of auto-enrolment for all employees could easily double pension costs for many employers – and they are not likely to accept this lying down.

The latest survey from the Association of Consulting Actuaries (ACA) shows that across most types of schemes, membership participation in workplace pensions varies between 45% to 70% of employees, with stakeholder pension participation lowest at, on average, 45% of eligible employees.  

Employers cut costs

Stuart Southall, ACA’s chairman, described the findings of the 2011 Pension Trends Survey as, ‘alarming in a number of ways. They point to a rising trend amongst employers of all sizes to review existing pension arrangements and, given the economic climate, for a goodly number to seek ways to reduce their pension costs’.

‘With not much more than a third of private sector employees now in pension arrangements and with many of these set to deliver very modest retirement incomes, the survey findings are disappointing in terms of the need to boost rather than diminish retirement incomes into the future,’ he said.

Worryingly, only just over a quarter of employers have budgeted for the potential increased cost of pension auto-enrolment, while a third of larger employers are looking to decrease their spend on workplace pensions and are hoping that between 12% and 17% of employees who are auto-enrolled will opt out. Some 73% of employers say they are likely to auto-enrol all employees into their existing workplace pensions, with 21% saying they are likely to enrol all employees into a new scheme. This will almost inevitably have lower benefits.

Some 27% of employers say they are likely to review their existing pension benefits to mitigate the cost of higher scheme membership in anticipation of the additional costs of auto-enrolment, with this rising to over a third amongst the largest employers. Smaller employers meanwhile are relying on 35% to 40% of employees opting-out of workplace pensions following auto-enrolment to keep costs down. Other employers may favour key employees, with a fifth of those questioned saying they may restrict entry into their existing scheme and auto-enrol the balance of employees into Nest which has minimum benefits.

Most worrying, 21% of employers report that member opt-outs from pension schemes have already increased – almost certainly reflecting the pressure on employee incomes over the last three years. This indicates that opt outs from auto enrolment could be higher than expected which is not what the government is hoping for if it wants to control benefit costs.

Pension dumbing down continues

The introduction of Nest, starting next year, will mean higher costs for all employers. At present only 38% of UK private sector employers provide a workplace pension scheme. But all will be required to auto-enrol their employees into a ‘qualifying workplace pension scheme’ under the government’s pension reforms between late 2012 and early 2016. 

By October 2017, minimum contributions must be 8% of employee earnings, with a minimum of 3% from the employer plus 4% from the employee and 1% tax relief.  But employees have an opt-out which also removes the employer’s need to contribute.

Many schemes with good benefits are likely to ‘dumb down’ their pension schemes to keep costs to a minimum. Some 43% of employers are targeting pension costs of 4% of payroll or more – 4% being the absolute minimum under Nest. Amongst employers with 49 or fewer employees – where the bulk of private sector firms are found – only just over a quarter (28%) are looking to a pension spend at or above this 4% level. 

‘As things stand, there is a clear danger of more ‘levelling-down’ – a trend which our surveys have identified for some years now. With contribution rates into many schemes failing to keep pace with the pension costs of longer life-spans, and with employers expecting, and in some cases relying upon high anticipated levels of pension opting-out for budgetary purposes to keep their auto-enrolment costs down, warning bells are ringing,’ Southall said.

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10 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Sep 01, 2011 at 16:24

"pension dumbing down continues" not in the public sector it doesn't. Its still trebles all round at the private sector's expense.

All public sector schemes should be made paid upwith immediate effect and all public sector workers auto enrolled into NEST

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Daye Tucker

Sep 01, 2011 at 22:53

Trust gone. REAL value still to implode on phoney evaluations.

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Sep 02, 2011 at 01:59

And lots and lots of pots for Balls (or Brown Mk II) to raid. Oodles and oodles of money for harebrained 'investment' or to be nissed up against the nearest wall,

Also watch a future govt (probably the EU as well) increase the employers contributions, but not that of the employees. Sneaky thin edge of the wedge.

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Peter Young Engineer

Sep 02, 2011 at 08:43

I retire next year (April). Was in a final salary scheme till aged 50 and in a personal pension since. My pension pot is reasonable and my income in retirement pretty good considering, but I will still suffer a >50% income drop.

If I am worried about how I will manage, how the hell are all these people with no provision thinking they will manage. It is all very well relying on State Benefits and Supplementary Income but anyone looking to the future surely must realise that with the growth of Baby Boomer Retirees, Government/Treasury will be trying every trick in and out of the book to control/reduce the payouts, it is already happening with Local Authorities.

Life is going to be pretty bleak for those who have not planned for retirement. Who wants to sit in a chair looking out of the window and watching the house fall apart for 25 or 30 years???

Of course those on Civil Service Pensions will suffer less but complaining about that will not help the rest of us.

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Jeremy Bosk

Sep 02, 2011 at 17:32

If employees had secure jobs with decent pay they would be able to save and would not need compulsion.

Any savings outside the pension fund are confiscated by the state during unemployment and sickness (the euphemism is means tested benefits).

All pension schemes involving state instruction on what they can and cannot invest in are doomed to mediocre performance.

All pension schemes administered by the private sector will have the benefits slashed by high management fees.

The only reasons to join a pension scheme are the tax relief going in and the exemption from means testing during unemployment and ill health.

People in low paid and insecure jobs cannot afford unemployment and payment protection insurances - which being rip offs themselves often do not pay out when needed.

They cannot afford the commitment to any regular savings scheme.

So they are unable to save beyond shoving money under the mattress which is then inflated away.

You want people to be secure in their old age without the state paying a big bill in social security? Then give them a better than living wage and stable employment while they are of working age and end means testing at all ages.

Abolish National Insurance Contributions for employers, employees and the self employed. They are a tax on jobs and are used by dishonest politicians as a stealth tax. Regain the lost revenue through income tax.

Put all state benefits into the PAYE system so that benefits are taxed as earnings. Have generous personal allowances so that those on low incomes are not liable to pay any income tax. This would be fairer, would save a lot of administrative complexity and a lot of the harm done by high marginal taxes as means tested benefits are withdrawn.

Easy peasy :-)

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Tony Evans

Sep 04, 2011 at 09:34

It seems to me that we have two very large pension 'holes': in the private sector, people are not saving anything like enough to cover their retirement as they would wish (me included) and secondly the public sector pensions issue of enormous commitment and not enough coverage, due to paying existing pensions out of the current account, so no money being put away to cover the current workers in retirement.

The former seems to get plenty of press coverage but the latter remains rather more 'dishonest' by pretending that the hole can be covered. Even the recent public sector pension review seemed to be in denial. Having said this, not all public sector pension schemes are in the same situation - some are well covered, but others are not.

Those that are not will presumably expect to be supported by the government in due course as the government is the ultimate guarantor. But wait a minute: where does the government get the money from? In the end, the private sector that generates real added value for the economy by bringing money into the system rather than just re-circulating it. And here are a lot of people who fall into the first category of not being able to fund their own retirement, never mind anyone else's.

Even if we assume for one glorious moment that this is the only financial problem that the nation 'enjoys', the political will to fix it seems to be lacking. This applies since the 1980s when the demographic issues and the cost of public and private sector pensions (final salary schemes) were first really understood. Even the last government - in a period of alleged unparalleled prosperity (now shown for what it was - the manic end of a long credit boom) couldn't bring itself to try and fix the problem properly.

Votes, votes, my kingdom for some votes....

So we get the government that we want because we are all burying our heads in the sand - or at least enough of us to not make the politicians on our collective behalf actually bite the bullet.

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Jeremy Bosk

Sep 04, 2011 at 16:01

Voters like to be given comforting lies. Or sometimes unpleasant lies as a cover for unpleasant political deeds but always lies. Thinking hurts.

I do not see that the public sector pensions issue is neglected in the media. Nor do I believe that all public sector workers are overpaid and get fat pensions at our expense.

I have known many public sector workers that are badly off. They are promised relatively large pensions to make up for the years of poor pay while working.

That there are some overpaid people at the top of the Public Sector is another issue.

Unfunded pension promises were always a bad idea. But keeping promises made to all public sector workers is only right and proper. Since pensions are taxable, then those who receive really big pensions will pay much higher taxes. This reduces the unfairness to those at the bottom of the heap.

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Jun 26, 2012 at 19:48

Annuities are bad value until the rates are adjusted to reflect blue chip returns rather than government stock. The government has got to stop using pension funds as a cheap source of funding the ever rising defecit. Until this happens, hang on to your money through drawdown and vote for the party that gives the private sector pensioner a fair deal. None of the main parties are doing that at present.

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Jeremy Bosk

Jun 27, 2012 at 00:50

Who complains loudest, the retired or the tax payers? If government is to repay its debts it must either raise taxes or manipulate interest rates. Keeping interest rates low is a stealth tax which Joe Public notices less than most others.

The sane and sensible option is to get the economy moving again, give people jobs and hope. More people working and spending will encourage businesses to invest creating a virtuous circle. More economic activity means more taxes and the ability to raise interest rates. Everyone benefits.

That this government does not do this indicates some combination of wilful ignorance, insanity and plain evil.

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Jun 27, 2012 at 12:02

The starting point is the red tape strangling small businesses which discourages them from employing anyone.

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