Broadly speaking, there have traditionally been three pillars of the pensions system - state, occupational and private (personal).
It is widely acknowledged that of those pillars, the state cannot continue to support the increasing burden of significantly increasing retirement funding needs, which are the unfortunate corollary of people living longer. The IMF's conclusion that Britain faced a potential £750 billion "pensions time bomb" was widely reported last year.
In the UK, in an attempt to counter the rising costs of an older population and ensure individuals are saving for the future, legislation has introduced "Automatic Enrolment" as a legal requirement for all UK employers. Through this scheme it is expected that between 5 and 9 million individuals in the UK will start saving for their retirement for the first time.
It is hoped Auto Enrolment will help to shift the weight of retirement benefit funding away from the welfare state and onto the occupational sector.
WHAT IS AUTOMATIC ENROLMENT?
During a 5½ year staging process that started on 1 October 2012, all UK employers must automatically enrol eligible jobholders in either a qualifying pension scheme or in "NEST", (the government-established pension scheme set up to enable employers without their own qualifying schemes to meet their Auto Enrolment duties), unless the jobholder is already a member of a qualifying scheme. Once Auto Enrolment has been completely phased in, employers will be required to contribute 3% of band earnings per year,
(contributions are by reference to bands of lower and higher earnings), towards an individual's pension scheme and the individual must contribute at least 5% of band earnings per year.
Eligible employees are those aged between 22 and state pension age, who earn at least £9,440 annual income, and include permanent and temporary employees and agency workers. However, employers must ensure that there is on-going monitoring of all of their employees' circumstances to ensure that they auto-enrol any individual not currently eligible but who becomes so at a later date.
It is possible for eligible job-holders to optout of the scheme but they will automatically be re-enrolled in the scheme every three years, which is aimed at ensuring individuals constantly review their future savings and a default opt-in to an employer sponsored retirement benefit arrangement.
SUCCESS TO DATE?
The start of October 2013 marked the 1st anniversary of the auto-enrolment requirements and figures show that:-
- 2,256 employers have auto-enrolled;
- 1.6 million employees have been autoenrolled;
- only 9% of those employees have chosen to opt-out of the process, a much lower opt-out rate than originally anticipated; and
- 1000 employers have signed up to NEST, which already has over 500,000 members.
WHAT ABOUT GUERNSEY AND JERSEY?
Closer to home, recent proposals to change the States of Guernsey's final salary scheme, and the trend of closure of other defined benefit schemes across both Guernsey and Jersey, have brought to the fore the importance of pensions and ensuring future generations have a pot for their retirement.
There are currently no plans to introduce auto-enrolment legislation in Guernsey or Jersey, however, the Channel Islands are not immune to the type of age related pensions time bomb that the IMF has alluded to. The average life expectancy in Guernsey is high, at 82.24 years, and similarly in Jersey is 81.47 years. Accordingly, taking steps to make sure individuals have sufficient funds for their retirement has never been more important.
Awareness of the need to address future pension funding issues in the Channel Islands is growing, and both the States of Guernsey and Jersey are giving consideration to how to provide a sustainable long-term retirement benefit solution for the islands. It is likely therefore that Jersey and Guernsey's thought leaders will be keeping a close eye on the success, or otherwise, of the UK's Auto Enrolment policy, to see if it represents a "NEST egg" for the future, and a panacea for the symptoms of what some perceive to be an already overburdened dependence on public sector retirement benefit funding in the islands.
There is, of course, no need to wait for the States of Guernsey and Jersey to introduce auto-enrolment legislation, and some local employers have already embraced the concept, and introduced a form of autoenrolment into their existing employer sponsored schemes.
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