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 )