The worst of times
There has never been a worse time to introduce auto-enrolment, says Teresa Hunter
It is foolhardy to try to guess when we will climb out of the current economic turmoil. In most previous recessions, we would be well through of the thick of things after four years of deteriorating growth.
But this, as the Governor of the Bank of England, Mervyn King, likes to remind us, is no ordinary recession. Living standards have fallen at the fastest rate since the 1920s. His prediction that high inflation and wage restraints would see incomes slide by the end of this year back to the level of 2005 looks about right.
A typical family will see their incomes fall by £4,600 in real terms by 2013 according to Unhappy Families, a report from the TUC. Was there ever a worse time to enrol workers into a pension scheme for the first time, thereby taking anything up to a further 6 per cent out of their wage packets?
The big unknown is what will happen when the ball starts rolling next October. Indeed, it could begin even earlier. Firms have the option to begin three months before the deadline, and many of the big supermarkets are expected to launch next July.
Initially, only large companies will be caught, which was supposed to smooth the transition. Conventional wisdom has it that this stage will pass almost unnoticed. As most large companies already have schemes, they will be merely mopping up the odd member of staff who somehow slipped through the net, or so the chatter has it.
As ever, the conventional wisdom is wrong on almost every count. Although large employers have large numbers of pensioned staff, they may well also have the most significant numbers outside pension arrangements, such as fleets of lorry drivers, and other contract, casual or temporary workers.
Furthermore, according to Standard Life, many of these companies do not intend to use the Government’s Nest scheme. Rather, they will continue to run their existing defined contribution schemes, into which these individuals will now be enrolled.
These staff are, by their very nature, at the bottom of the pay scale. Joining the company’s existing company arrangements could cost them the loss of perhaps 5 or 6 per cent of their salary, at a time they may already be struggling to make ends meet.
Such a big hit on their wage packets is unlikely to pass unnoticed. Having covered tax and other personal finance issues for a few decades now, I can promise you, that all such matters go entirely unnoticed until they hit wage packets.
The 10p tax row was a case in point. Announced well in advance, without a murmur, it was only when individuals felt the pain in their pocket that they started to scream. On this basis, we should expect opt-outs to be high. Standard Life expects 40 per cent of those currently without a pension to opt-out of these new arrangements. It thinks this is a very good result. I can’t see why.
Another challenge to the pensions industry relates to market volatility. What happens if asset prices remain as volatile this time next year as they are today? Staff who have never invested in risky assets, and can hardly afford to save anyway, are likely to be horrified when they see their hard-earned wages disappearing at the first downturn.
The worst case scenario might be that the European crisis drags on for many months. What if just as auto-enrolment gets underway, the much-predicted halving of share prices actually comes to pass? Who could blame workers badly hit from refusing to ever save in a pension again?
So although the Government has made it clear, that there can be no delay or reprieve even for small businesses under severe pressure. They must introduce auto-enrolment by 2014. But if the economy has still not improved at that stage, it is not inconceivable this decision will have to be revisited.
It may be true that there is never a good time to introduce a new system of quasi-compulsory pension saving. But of one thing we can be sure. There has rarely been a worse time.