All firms must offer pensions, government agrees

The government has agreed that all UK businesses, regardless of size, should offer a company pension scheme or enrol their staff into the new National Employment Savings Trust (Nest).

Nest is due to start next year, with all firms joining by September 2016.

The government says it will mean that between four million and eight million workers will start to save in a pension scheme for the first time.

To be eligible for automatic enrolment, staff will have to earn at least £7,475 a year.

However their contributions will be based on their income above the national insurance earnings threshold - currently £5,715.

Workers whose earnings lie between those two levels should be able to opt into Nest and receive employer contributions as well.

The revised rules on Nest come in the recommendations of an independent review into the way workers should be automatically enrolled into the scheme.

The findings of the review were welcomed by Pensions Minister Steve Webb.

"The National Employment Savings Trust (Nest) will be the new low-cost pension scheme that will be the vehicle for saving for millions," he said.

"For the first time, employers will have to make pension contributions for eligible workers from 2012, ending decades of decline of membership in workplace pension schemes," he added.

The principle of automatic enrolment of employees into pension schemes was established in the Pensions Act (2008), which set out reforms designed to make saving for retirement the norm among employees.

The key feature was that all employers should provide an adequate pension scheme for their eligible employees.

Typically, that means staff who are aged 22 or more and currently earning more than £7,475 a year - the personal allowance for income tax.

If such a scheme is not provided, then the staff will have to be automatically enrolled in Nest instead.

Employers and employees will also have to make a minimum level of contributions, eventually amounting to 8% of income a year.

The Federation of Small Businesses (FSB) said it was disappointed.

"The proposed changes are still complicated for micro businesses to put in place," said Mike Cherry of the FSB.

"The cost and time spent on administrative work will damage micro firms - those with 10 employees or less."

Employers will be given three months' grace to enrol their staff in either their own scheme - with compulsory minimum employer contributions - or enrol them in Nest instead.

This element was welcomed by the British Chambers of Commerce (BCC).

"Thanks to the 12-week exemption, companies with a high turnover of staff or a large number of seasonal workers will not have to spend a lot of time and money enrolling employees into pensions that they do not intend to continue," said Dr Adam Marshall of the BCC.

The review says if a member of staff chooses to sign up before the three-month period elapses, companies will be forced to make contributions then as well.

The aim is to make sure people who often change jobs can build up a pension pot for their retirement.

However Labour said the revised Nest plan, with a higher qualifying threshold and the three-month waiting period, would disadvantage low paid women workers in particular.

"Those that lose out are likely to be the very people that the scheme was designed to reach - namely women and part-time workers, and temporary and agency workers," said Labour spokeswoman Rachel Reeves.

Nest is due to start next year, with automatic enrolment starting in October 2012, with the largest employers joining first and the smallest joining by September 2016.

Contributions from staff and employers will also be phased in.

Until October 2016, the minimum overall level of contributions will be just 2%, with 1% coming from employers.

From October 2016 to September 2017, total contributions will be 5% with 2% coming from employers.

And from October 2017, the total minimum contribution level will be 8%, with employers contributing at least 3%.

The pension consultants Aon Hewitt warned that lifelong savings in Nest would probably produce only a modest pension.

"Our recent research shows us that the minimum contribution levels will deliver only a very small pension in monetary terms," said John Foster of Aon Hewitt.

"Our projections reveal that a person earning £20,000 who starts their pension aged 30, can expect an annual retirement income of £1,973."

However actuaries Hymans Robertson were more optimistic.

"Based on UK average earnings of £25,000 a year and the 8% contribution rate we estimate employees could accrue a pension of £7,000 based on 30 years of contributions or £2,000 based on 15 years worth," said the firm's Lee Hollingworth.