In 2012, every employer in the land will be required by law to auto-enrol their eligible employees into a qualifying workplace pension scheme.
There are around10 million employees who will be eligible for auto-enrolment and they are working for just over a million different employers.
Those employers will be responsible for identifying eligible employees and auto-enrolling them into qualifying schemes, with the massive new scheme of personal accounts as a default where employers do not have qualifying schemes of their own available.
Under these new regulations, employers will also become responsible for deducting the appropriate level of contributions and sending them to the pension providers. Every employer will have to do this regardless of size – from the very largest corporations to our local chip shops.
This will, in my opinion, be quite a palaver for employers and will come with a sizeable education requirement (think analogue to digital TV switch and multiply it by a big number).
Where auto-enrolled employees decide to remain in qualifying schemes (they have the option of opting out, but only after they are auto-enrolled), they are required to contribute 4 per cent of a band of earnings called qualifying earnings. The taxman adds a further 1 per cent in tax relief and the employer must add 3 per cent, taking the total amount invested in the pension scheme to 8 per cent of qualifying earnings.
It struck me, as I said, that there ought to be a simpler way for us to achieve the same result without burdening employers with so much additional work.
The overall idea is a simple one really – we need to get money from millions of employees and employers every week, sometimes in tiny amounts, and pass that money over to be invested in private sector pension arrangements.
One way of doing that would be to introduce a new additional (but, for employees, voluntary) class of National Insurance contributions for eligible employees and their employers. Money thus collected could be moved to private sector pension schemes through enforced contracting-out.
The employees’ 4 per cent would attract tax relief once invested in the pension arrangement, thus ensuring that the full 8 per cent of band earnings becomes invested in the private sector while utilising existing processes of contribution collection and contracting-out that are tried and tested and functioning centrally already. If nothing else, that could save a lot of money.
It is surely not too late to apply a different method of thinking to this problem is it? There is no real need for a million employers and over 10 million employees to be educated, no need for all for employers to build new human resources processes – no real need to build the biggest private sector pension scheme in the world – no need, in fact, to reinvent the wheel, is there?
Steve Bee is head of pensions strategy at Scottish Life