The Government recently announced a delay for many workers over plans to automatically enrol all employees into a workplace pension. Tom McPhail (pictured, right), from financial adviser firm Hargreaves Lansdown, says the hold-up is a mistake...
The Government's plans to automatically enrol millions of non-savers into workplace pensions over the next few years could be a pivotal moment in this country's struggle to address its developing pensions crisis.
If successful, the auto-enrolment programme could be the transformative moment when we stop going backwards and actually start rebuilding our long term savings.
So the announcement a few weeks ago that the Government had decided to delay auto-enrolment for small to medium sized businesses, in some cases pushing it back until after the next election, is one which could have far-reaching consequences.
I cannot pretend that I welcome this announcement, or the inevitable uncertainty which it now brings to the broader auto-enrolment project.
The rationale behind auto-enrolment is quite straightforward: too many people do not take the initiative for themselves to start saving for retirement.
However, once put into a pension, most people then choose to go with the flow and stay in the pension.
We all need to be in it together
There is also an important element of universality to the terms under which auto-enrolment is being rolled out. Just about everyone between the ages of 22 and state pension age who is in paid employment, except the very low earners, will be saving for retirement.
This principle of 'we're all in this together' is an important dimension, not just for the sense of fairness it engenders but also because it means that employees can expect a pension contribution from their employer, irrespective of who they work for.
By including all employers in the rules, irrespective of how many people they employ, it also eliminates any risk of market-distorting behaviour which could ensue if employers knew that once their workforce rose above a certain number they would have to start a pension for them.
The Government is mindful of the fragile state of the economy and is particularly keen not to impose excessive red tape or regulations on small employers.
Its thinking therefore seems to be that by delaying auto-enrolment for businesses with fewer than 3,000 employees and pushing businesses of fewer than 50 employees back beyond the start of the next parliament (2015), it will give these small businesses that little bit more time to help the economy recover before they have to start paying money into their employees' pensions.
It is worth noting that it is amongst these small businesses that auto-enrolment is most necessary. The larger a company is, the more likely it is that it will already be operating a work place pension.
Letting people down
So by delaying auto-enrolment for smaller businesses, the government is letting down the very people for whom the whole programme was in large part designed in the first place.
As with the original auto-enrolment timetable, large employers (more than 120,000 employees) will still have to start enrolling employees from October 2012, with progressively smaller businesses being brought in over the next couple of years.
By August 2013, we'll have got down to businesses of 3,000 or more employees and based on this latest announcement from the government, at that point there will be a pause.
The Government has promised to publish a revised timetable for the remaining businesses early in the New Year, and hopefully this revised timetable will confirm that within the next few years, by 2017 at the latest, all employees earning over around £7,500 a year will have been put into a pension.
Even once this has been achieved, it will only be a start. The default contribution rate of 8% of earnings, comprising 3% from the employer, 4% from the employee and 1% from the Government, will not be enough to buy a good standard of living in retirement.
The next challenge will be to encourage everyone to take an active and personal interest in how much they are saving and what kind of a retirement income that could deliver; that could take a while longer to achieve.
Views expressed do not necessarily reflect those of MoneySavingExpert.com.