Smaller firms get extra time to prepare for new pension scheme

Small businesses are to be given flexibility over the introduction of the government’s new compulsory workplace pension scheme.

The scheme is to be known as the National Employment Savings Trust (NEST), a change from the original Personal Accounts, and is aimed at employees aged over 22, earning between £5,035 and £33,540 and who do not have an occupational pension scheme.

Described as a “landmark reform” by Pensions Minister, Angela Eagle, the scheme will see all employees who are not already members of a qualifying occupational pension scheme enrolled into the fund.

The scheme is to commence in October 2012 when the largest businesses – those employing 120,000 staff or more – will begin enrolling workers.

However, smaller firms will join the scheme on a phased basis over the next three years. Start-up businesses formed from 2012 won’t be required to implement a NEST fund until 2016. Auto-enrolment is expected to be fully introduced by 2017.

Employer contributions will also be implemented on a staggered schedule. Employers will be required to contribute a minimum of 1 per cent of an employee’s gross salary to the fund as from 2012. That will rise to 2 per cent from 2016 before reaching 3 per cent in October 2017.

Announcing the details, Yvette Cooper, the Secretary of State for Work and Pensions said: “Even during these difficult economic times, employers, industry and unions agreed with us that these reforms were vital in giving millions of people the chance to save in a pension for the first time.

“All employers will be required to pay into a pension for their workers for the first time. We have responded to the concerns of business to make the introduction of these reforms as straightforward as possible. Start-up businesses will be given valuable extra time to prepare for these changes as we come out of recession.”

Currently, some 14 million people get no contribution from their employer towards a pension and around 7 million people are not saving enough for their retirement.

Ms Cooper concluded: “These reforms will give everyone the chance to build up a pension. It is the biggest change to support for working people since the introduction of the minimum wage.”

Angela Eagle, the Pensions Minister, commented: “These landmark reforms, on a scale unprecedented anywhere in the world, will ensure millions of workers on low and moderate incomes will be able to save for their retirement with a guaranteed new minimum contribution from their employer, many for the first time.

“It is essential we get the foundations right and continue to focus on minimising any process burdens on business. With the publication of the regulations today, we take a big step closer to automatic enrolment from 2012, moving from consulting with employers into a phase where we explain in clear and simple terms what their obligations will be.”

Some experts, however, have cast doubt on the ability of the scheme to provide a viable retirement income.

Ros Altmann, of the London School of Economics and a former pensions adviser to the government, warned that employers could opt to reduce contributions to the basic level and that some low-paid workers could lose out because their NEST savings may disbar them from means-tested benefits in retirement.

Ms Altmann said: “Employers will cut back towards the minimum. And many workers also face the danger that employers will cut their pension contributions back to the NEST minimum, which is less than half of current average employer pension contributions.

“This levelling down effect is already starting, as the government has given employers a new target to aim at – as long as they are putting in 3 per cent that’s all they need to do.”

She added: “The image of a nest egg is misleading because so many will find their nest is empty as they have saved merely to replace means tested benefits they would otherwise have had.”

The Forum of Private Business (FSB) welcomed the additional time granted smaller firms.

Nick Palin, the FSB’s director of human resources, said: “We were listened to and our initial fears that these compulsory pensions contributions would hit small businesses too quickly for them to adjust have, to some degree, been addressed.”

But Mr Palin expressed concerns that small firms, which account for 59 per cent of the private sector working population, will ultimately bear the brunt of the pensions crisis and that job creation will suffer as a result.

Katja Hall, the CBI’s director of employment policy, agreed on the issue of phasing: “The changes announced today show that the government has listened to businesses. We are pleased that firms will face fewer short deadlines and less paperwork than was previously proposed, particularly given the challenging economic conditions.”

But Ms Hall argued that, with discussions still taking place about how the reforms will affect firms with existing pension schemes, the government must ensure it does not make the system too onerous for companies who are already doing more than the law will require as it could encourage them to cut contributions to the legal minimum.