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Set up for life

4th November 2010
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Which of the following most accurately describes the problem?

Plans to make pensions mandatory have been met with mixed response

Words: Pat Hagan Just like Wayne Rooney, The X Factor and public spending cuts, pensions are rarely out of the news headlines these days.

Britain is gradually coming to terms with the realisation that while longer lifespans may be a sign of significant medical and scientific progress, they also place a crushing financial burden on the country's coffers.

When the first contributory state pension was introduced in 1926, only a third of men and 40% of women were expected to live to 65. Now life expectancy is nearer to 86 for men and 89 for women, which means many pensioners will spend almost a third of their lives in retirement and drawing a state pension.

Yet government estimates show that about seven million people are not saving enough for retirement. It has already set out plans to raise the state pension age to 66 for men by 2016 and women by 2020.

Burden on the state

Meanwhile, to ease some of the burden on the state finances, there are plans to make it legally binding for every UK business — regardless of its size — to enrol employees into a workplace pension scheme from 1 October 2012.

Under existing regulations, any employer with five or more staff is obliged to offer staff access to a pension scheme. These can be set up either on a contributory basis, where staff chip in a percentage of their wages to the fund, or non-contributory, where the employer alone pays in a regular amount.

The new "auto-enrolment" plans, initially drawn up by the former Labour government, call for every employee not covered by any existing pension plans. to be automatically signed up to a scheme, whether they ask to he or not.

If the company does not provide its own pension plans, or it runs a final-salary scheme that has been closed to new staff, it will have to automatically enrol new workers into a government-backed scheme called the National Employment Savings Trust (NEST).

Final-salary schemes, also known as defined benefit schemes, have traditionally been seen as the best type of pension a worker can get. They promise to pay a retirement income based on a percentage of salary every year for the rest of your life. The amount varies but is typically between a half and a third of the final salary.

Financial. provision

But with almost nine million people in final-salary schemes, many employers have closed them to new entrants because they say they are expensive to run.

The NEST is to form the backbone of the new initiative to coerce employers and staff into making some financial provision for the future.The scheme is due to come into force on I October 2012.

Under the terms of NEST, a minimum of 8% of earnings must be paid into the scheme.The employer has to contribute 3% of this and the worker at least 5%, although this is flexible. The scheme will apply to those earning between £5,035 and £33,540 a year, although the government is considering raising the minimum to £7,500 or more.

The Pensions Advisory Service says the idea is to stop employees slipping through the net or postponing decisions on pensions. "Auto-enrolment will mean workers being automatically enrolled into their employer's qualifying pension scheme without any active decision on their part," it says.

"Today, many workers fail to take up valuable pension benefits because they do not make an application to join their employer's scheme. Auto-enrolment is designed to overcome this."

Opt-out period

But there will be an opt-out period, during which the employee can choose not Lobe part of the scheme. They will then he refunded any contributions they might have been forced to make during the initial sign-up.

The initial proposals called for enrolment to occur from the first date of employment. But the coalition government has taken a slightly softer stance and is considering allowing employers three months' grace before staff are automatically enrolled, to ease the burden on companies employing large numbers of ternporary workers.

Critics fear the plan will damage small firms and make them non-competitive. The Federation of Small Businesses warns the smallest firms will be hit hardest. It claims the cost and time spent on administrative work will damage employers with 10 staff or less and that the pension schemes set up by government do not meet small firms needs.

And some small-to-medium hauliers fear staff may not welcome the prospect of being forcibly enrolled into a pension scheme, even if they can opt out later.

Paul Arthurton, of Paul Arthurton Transport, in Attleborough, Norfolk. says that, in the current climate. many of his 17 drivers are more concerned with being able to get a mortgage than plan for their retirement.

"They want a house now rather than worry about what's going to happen to them in 30 years' time. If it becomes the law that we have to enrol them into a pension scheme, then we will have to deal with it,Arthurton says.

"But if that's the case, I think employers should be asked to pay lower National Insurance contributions for staff, given that some of that goes towards state pensions. If the government wants us to pay for private pensions, it should stop taking some of that money," he says •


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