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Companies will be forced to enrol staff into private pension schemes from 2012 in a bid to make the UK save more

The coalition government is to press ahead with a Labour scheme to force all UK firms, regardless of size, to automatically enrol their staff into a pension scheme from 2012.

Companies will be told pay in a minimum of 1% of every worker’s salary into a pension, rising to 3% by 2017. Workers will have to pay in a portion of their salary, phased in over five years, starting at 1% of pay and rising to 4% by 2017.

Every employer, large and small, will have to participate, although not the self-employed. It will mean that hundreds of thousands of small firms that currently do not offer or pay into a pension scheme will have to begin making payments. Many are expected to opt to use a new government-run pension scheme, called “Nest” (National Employment Savings Trust), which promises low costs and charges.

But Pensions Minister Steve Webb has stepped back from earlier proposals to make workers pay in from the first day of employment. Instead there will be a “waiting period” of three months before an employee is automatically enrolled, unless they ask to join earlier.

The level of earnings at which employees will be enrolled will also rise from Labour’s proposed figure of £5,035, to £7,475 (the personal allowance for income tax from April 2011).

Webb said that the reforms will “end decades of decline of membership in workplace pension schemes.” He estimated that an additional four to eight million people will start to build up savings for retirement, but dismissed critics who warn of a “levelling down” of existing corporate provision.

Employers currently pay an average of 6.1% of workers’ salaries into their pensions. Critics say the changes may lead to some employers reducing their contributions to a minimum, with the norm dropping towards 3%.

There are also fears that low-income earners will simply lose means-tested pension benefits, such as pension credit, as they are forced to accumulate a small pot of money for retirement. Webb said: “We will be trying to make sure that saving is rewarded and we want to make sure that the issues around making it worthwhile to save are tackled.”

Employers who fail to make payments on behalf of their workers will face sanctions from the Pensions Regulator, which will have the power to fine recalcitrant companies.

But the concern is that forcing micro-firms to enrol staff may backfire. The reality will be that very few employees of micro-businesses will actually be auto-enrolled. It is going to place a huge burden on the regulators to attempt to police hundreds of thousand of micro-businesses whose employees may well choose not to engage with pension’s saving.

If you need advice on any of the issues raised please contact Haxton, Chartered Accountants in West London.

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