Tuesday, 21 February 2012


Don’t get me wrong. I believe in pensions. But sometimes my faith is tested by the arithmetic.

From October the pensions faith will be spread through our largely agnostic country as almost everyone at work will begin to be enrolled willy nilly into a pension scheme.

Auto-enrolment will start with people working for the biggest employers and by February 2014 will include everyone in a firm of 250 employees or more.

After that it will reach out to assimilate even ‘micro’ firms with fewer than 30 employees by April 2017. A few exceptions will then be mopped up and by February 2018 every UK employer – even with one employee – will have to enrol staff automatically into a pension scheme and pay into it. That will bring pensions to between eight and ten million more than now pay into one.

I have no problem with that. Everyone paying into a pension scheme is a Good Thing.

It’s my faith.

But it is challenged by the arithmetic, especially during this five year ‘staging in’ period.

Throughout that time the compulsory amount paid into the scheme will be 1% of pay by the employer and another 1% of pay by the employee. But that does not make 2% of pay. Because ‘pay’ is only between a lower and upper limit, probably £5,564 and £39,853.

For someone on minimum wage of £12,600 a year the total going into the pension will be just 1.1% of gross pay, barely £140 a year. Even at average earnings of £26,000 contributions will total a miserly 1.6%, a fraction above £400 a year. And that includes the tax relief.

Although joining the pension scheme is compulsory, everyone will have the right to leave at any time. The hope is that contributions will be so low people will barely notice. Even if they do leave they will be re-auto-enrolled every three years or whenever they change jobs.

So inertia will keep most people in the scheme. The Government estimates that between 2 and 4 million will opt out leaving 5 to 8 million newly in a pension scheme.

In October 2017, five years after it begins, ‘staging in’ will be finished and contributions will rise to 2% from the employer and 3% from the employee. A year later they will rise again to 3% employer and 5% employee on the band of earnings. That makes 4.5% of gross pay on minimum wage and 6.3% on average earnings.

Those final amounts paid over a decade or two (or preferably three or four) might buy a half half-decent pension. The average paid into this kind of scheme now is 9.3% and the employer pays the bigger share.

But in the early years when it is well below 2% it will be impossible to say honestly ‘stay in auto-enrolment because it will give you a good pension when you retire’. The amount going in is far too tiny to do that. 

I probably will say ‘don’t opt out because pensions are a Good Thing’. I believe in them. And most of it is paid by your employer and the Chancellor’s tax relief. And you can pay in more. Etc etc.

But when I do I will be ignoring the arithmetic and relying on my faith.
1. People under 22 or over state pension age will not be automatically enrolled nor will those with an income below the trigger point – expected to be £8,105. Anyone over 16 can join and if they earn over £5,564 the employer has to pay in too.
2. The figures are based on the latest proposals from the Government’s Dec 2011 consultation paper. The final figures may differ slightly. Employers and employees can pay in more than the minimum.
3. Average contributions into pension pot schemes are 9.3%, split 6.4% employer and 2.9% employee (Pension Trends Chapter 8, ONS, September 2011 http://www.ons.gov.uk/ons/rel/pensions/pension-trends/chapter-8--pension-contributions--2011-edition-/index.html )


  1. Great post Paul, and I think many in the know on pensions will feel remarkably similar to you on this. Personally, I think the policy is worth doing if for no other reason than a decent number of younger folks will make a start at a stage in life where compound interest can do its thing and make it worthwhile. And if nothing else, I cant help but think that having so many people forced to decide whether they should be saving for their future is a good thing. Puts it in their head when so little else succeeds in doing this.

    But on the negative side, in addition to the issues about staging making the amounts so piddly as to be barely worthwhile, and even when up to full force still not enough to ensure a decent pension, my other worry is the thorny old chestnut of the means testing trap. It still makes no sense to me that the very target audience that Westminster is going to push into these arrangements - those on lower incomes who have never saved before - will be the ones most likely to waste almost all of the money they save by simply eroding their own means tested benefits. Their next door neighbour might have opted out throughout, spent the money on lifes pleasures and will enjoy the same income in retirement as someone who stayed opted in. Steve Webb the pensions minister knows all about this trap, has said the solution is to raise State Pensions for all, but there is NO sign this will ever happen, and every sign the Government will conclude it cant afford to do it. Result will be Pensions misselling by Government policy on the grandest scale yet seen. Why is the UK sleep walking into this absurd situation?

    Martin Campbell

  2. My view is that something is better than nothing - even if the final amount is small.

    Many people have been sleepwalking into retirement for a number of years and maybe this is part of the wake-up call they need. I say 'part' because the other consideration is that while the government keeps tinkering with retirement ages, even those who are saving a decent sum could end up with a shortfall or lower amount than they had anticipated due to including their government pension in their calculations as well as basing their projections on current annuity rates (which have been falling).

    I must admit, much as I care about my own pension, it really is like catching falling swords. There's a good chance that I'm going to end up with some cuts & bruises - that's if one doesn't kill me first!!