31st May 2011
From next year employees will start to be automatically enrolled into an employer pension unless they decide to opt out.
If employees decide to stay in a pension their employer will have to contribute as well. The system will be phased in, starting with bigger employers first. Contributions also start low but rise over time.
Within the next five to six years, the Government hopes that a baseline pension contribution will have been established, involving four per cent from employees, three per cent from employers (at least) and one per cent from the Government all of which will be invested.
You may be invested in a good private sector scheme which your employer has arranged or into Nest – the National Employment Savings Trust – a centrally organised Government scheme which has a range of investment options.
It has long been predicted that the scheme would face more criticism as we got closer to its launch. Writing in his blog, this week, Telegraph personal finance editor Ian Cowie makes it clear he is no fan.
He writes: "Perhaps the only justification for introducing another auto-enrolled pension, in addition to the Basic State Pension and State Second Pension, was that economies of scale would mean it should be much cheaper and therefore better value than anything else on offer.
"So news that the new pension will have initial contribution charges of 2pc plus annual management fees of 0.3pc is desperately disappointing. That's more than a third higher than Stakeholder Pensions – the Government's last Big Idea on this front – and substantially more expensive than several investment trust-based pensions."
That isn't his only issue. Mr Cowie is also worried about a tax on business and the fact that some poorer families may end up saving when they can least afford to because of economic conditions.
Pitt Watson frets that a lot of investors' money will be wasted and that the new auto-enrolled scheme does not have enough controls on charges or where the money is invested.
He predicts a huge new pensions misselling scandal.
He writes: "History suggests we can expect that many will be sold pensions where 50 per cent or more of their potential pension disappears in charges.
"Perhaps even worse, it seems there are no restrictions on how the money will be invested, or adequate standards for the records that providers will need to keep. A recipe, some might say, for fraud."
This will not be music to the Government's ears. Crucially with auto-enrolment or soft compulsion, the idea is that people don't actively quit the company pension when given the choice. Inertia serves to stop people leaving the pension rather than stopping them joining as it does now.
But if the media starts advocating that people opt out of the new pension, and more commentators raise fears about misselling, it could undermine the Government's case.
A look at the Telegraph comment boards shows some readers are already convinced.
The Government will be hoping that poglewoodsman is not typical.
"What the Government is planning is really a fairly well-known and traditional type of transaction. It's been going on from the dawn of time. A product is offered, for which payment is demanded. But ultimately, the product is withheld. The buyer never receiving the product, nor his money back.