Auto-enrolment: the get rich scheme for pension companies

I recently attended a meeting with the pension regulator and found it amazing how complex auto-enrolment is and how easy it will be for a business to get it wrong.

It was good to hear how the enforcer will be looking for them to get it right. The message from government is that they are really serious about getting people to pay and save for their retirement.

While this is a step forward, in my opinion, there are two main reasons that people will choose to opt out: the time that the scheme’s being brought in, and the way that it’s administered.

According to research recently carried out for Aviva, more than a third of UK workers have said they will opt out. The main reason? Finding the spare cash to contribute. These are austere times, after all.

As for the administration, the process of buying annuities is flawed, in my opinion, and until that’s resolved people will still look to opt out or only contribute the bare minimum.

The question is, how come the pension scheme companies make all the money?

Quite simply, when you’ve purchased your annuity, the money has gone from the pension pot.  So a £100,000 pension will buy you a pension of say £100 per week, and this will pass to your spouse upon your death. When they die, the pension company pockets the fund.

So, a £100,000 investment giving a 5% return will effectively cover the annual pension.

All your savings through the years don’t pass to your estate, but go on making the pension scheme providers rich. Nice work if you can get it.

Rant over. Auto-enrolment is here and operational. It’s the biggest burden on employers for many years; not only because of the high cost in administering the information but the additional cost of 1%, increasing to 3% in employers’ contributions, to boot.

A nice treat from the government there, at a time when businesses are recovering from the recession, it’s all they need. Thankfully most small companies have until next year to start their schemes and the micro business until 2017, so we might not all be in it together today, but it’s something employers need to be planning for.

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