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Crazy phasing

The latest set of draft regulations on workplace pension reform is entitled, Completing the Picture. Having read the regulations. I have come to the conclusion that the picture is an abstract one that not everybody will appreciate.

If we believe all we are told about the need for workplace pension reform, it is necessary because millions of employees have no retirement savings whatsoever and will therefore be reliant on just the basic state pension and the state second pension when they retire , neither of which is that much to write home about. The state offers such poor levels of income replacement in retirement, in fact, that millions of people retiring today are entitled to means-tested handouts to supplement their inadequate state pensions. If reforms do not kick in soon, then evermore millions of future retirees will end up in the same boat.

Workplace pension coverage is polarised and it always has been. Since the 1960s, about half of the employees in the country have been lucky enough to be members of company pension schemes but half have not. But even though half of us have had the benefit of being in an employer’s pension scheme, it is not half of the employers that provide them. On the whole, it is a small number of large employers which run pension schemes, while a large number of small employers do not. The vast majority of employers do not run pension schemes and never have done.

These “reforms” that were meant to be coming in in 2012 will make it a legal requirement that practically every employer will have a pension scheme that their eligible employees must be auto-enrolled into. One significant new twist in these ever-changing regulations means the implementation of these reforms will now be phased in over a period of many years. This is necessary because the penny seems to have dropped for those considering the practicalities of auto-enrolling millions of employees into pension schemes.

How will the phasing process work? Will all the small employers whose employees have no pensions go first and the large employers whose employees already have good pensions go last? No. Quite the opposite. What? Yes, you heard me right. The first employers who will be subject to these new laws requiring them to run pension schemes will be those who by and large already have them and always have done. The last employers to be required by law to implement workplace pension schemes will be those who do not have them and by and large never did have them.

I will leave you with this thought. An employee of a large company who gets auto-enrolled in the first wave of phasing in 2012 and takes up the option of opting out could well be re-enrolled under the three-yearly auto-enrolment rule before some employees of so-called micro-employers are auto-enrolled for the first time.

This just seems completely crazy to me.

Steve Bee is head of pensions strategy at Scottish Life

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