Automatic enrolment in workplace pensions from October 2012: FAQs Introduction
From 1 October 2012, millions of workers are expected to be automatically enrolled into a workplace pension for the first time. Below is a brief summary of what automatic enrolment involves, and of the NAO’s work so far on pensions regulation.
Frequently asked questions
Q: What is automatic enrolment?
A workplace pension is a way of saving for retirement arranged through an employer. Starting with the largest employers, from 1 October 2012 workers meeting the qualifying criteria will be automatically enrolled into a qualifying workplace pension scheme by their employer. Workers can opt out of the scheme if they do not wish to be enrolled.
Q: Whom does automatic enrolment affect?
Employers will have to enrol automatically all UK workers aged between 22 years old and state pension age who earn more than £8,105 a year and who are not already in a pension at work. Workers who do not qualify to be automatically enrolled still have the right to join their employer’s workplace pension if they want.
Q: Why is the Government introducing automatic enrolment?
The aim of automatic enrolment is to make it easier for people to save for their retirement. At present, many workers do not participate in workplace pension schemes and therefore do not benefit from contributions that employers make towards pensions of participating members. Automatic enrolment is meant to overcome this.
Q: What is a defined contribution pension scheme?
Defined contribution pension schemes are increasingly used in workplace saving for retirement. They provide a retirement income for scheme members, from a pot of money accumulated during their employment. The pot is built up by investing contributions paid in (usually) by the employee and the employer. These contributions are subject to tax relief. On retirement, the pot is most commonly used to buy an annuity (regular payment), which provides an income for the rest of the member’s life.The Department for Work and Pensions forecasts that introducing automatic enrolment will increase active membership of these schemes by between 5 million and 8 million people from October 2012 until February 2018.
Q: Who regulates defined contribution pension schemes?
The Pensions Regulator is responsible, through its statutory objectives, for protecting the benefits of members of defined contribution schemes. It regulates all work-based pension schemes, although it shares responsibility for regulating some defined contribution schemes – personal work-based (also called contract-based) schemes – with the Financial Services Authority. The Pensions Regulator will be responsible for ensuring that employers comply with their legal duties in relation to automatic enrolment.
Q: What work has the NAO done regarding work-based pension schemes?
The work of the NAO in this area has focused on the effectiveness of regulation of these schemes.In July 2012, the NAO published a report, Regulating defined contribution pension schemes, which examined the effectiveness of the regulation of defined contribution pension schemes, and how well the Pensions Regulator’s statutory objective to protect members’ benefits in these schemes is being realised.In October 2007, the NAO published a report, The Pensions Regulator: Progress in establishing its new regulatory approach, which examined whether The Pensions Regulator had put in place appropriate processes to meet its statutory objectives for regulating all work-based pension schemes in a risk-based manner.
Q: Why should the taxpayer be interested in how defined contribution pensions are regulated?
Our July 2012 report
highlighted the taxpayer’s substantial interest in the effectiveness of the regulatory system. In 2010-11, tax relief for employer-sponsored, private sector defined contribution schemes amounted to an estimated £8.5 billion. The Department for Work and Pensions estimates that introducing automatic enrolment will increase private pension incomes by between £10 billion and £16 billion by 2050 and that this will save £1 billion in income-related benefits by 2050.