The scheme requires employers to offer a company pension. In the past, workers had actively to sign up to their employer's pension scheme – now, they must actively opt out. Yet while the high uptake so far has prompted a round of back-patting, experts warn it is too early to call the scheme a success. "These results shouldn't lull people into a false sense of security that the pensions crisis is now solved – that is far from the case," says pensions expert Ros Altmann.
It is particularly aimed at the lower paid, such as cleaners, shop workers and catering staff, and those in a small business not already in a scheme. Yet only the biggest companies have so far started enrolling workers into new workplace pensions since October 2012. Medium-sized companies will do so from April 2014, and firms with fewer than 50 employees start in June 2015, with all eligible workers enrolled by 2018.
However, Altmann says minimum contribution rates are "simply not going to deliver much at all". Both worker and employer will pay in, with each contributing – to start with – around 1% of gross earnings. By late 2018, the total minimum contribution will have risen to 8% – at least 3% from the company, up to 4% from the employee and 1% tax relief. At present, contributions only apply to "qualifying earnings" from £5,668 to £41,450 in the 2013/14 tax year.
"The government's plans for state pension reform mean many people, particularly lower earners, will receive reduced state pensions in future and private pension saving is meant to make up for a lower state pension – but these contribution levels are far from enough to replace this loss," she says.
If you are 22 or over, earning more than £9,440 a year and have been employed for three months or more, you will be enrolled into a scheme. But is it worth staying on it?
Should I opt out?
You should consider doing so if you're behind on your mortgage, rent, credit card or other debt payments, as these take priority. But by opting out, you miss out on the contribution your employer puts in. The maths makes greater sense for younger workers. Figures prepared for the Observer suggest that a 55-year-old earning the UK average wage of £21,473 a year will, after 11 years of paying into the scheme, have saved enough to achieve an annual income of just £45.71 a month at age 66 in today's terms, after inflation.
To opt out you will need to fill in a form from the pension scheme and give it to your employer – and you have only a month to do it. You'll be automatically re-enrolled every three years.
Is it worth paying in more?
The "cost of living crisis" will make it impossible for many workers to increase contributions, with opt-out rates expected to increase as contribution levels rise. Minimum contributions will gradually increase to 4% of pay after tax, topped up with 1% tax relief by the government, but you are able to pay in up to 100% of salary. However, some employers give their staff an incentive to save more than the minimum by matching additional contributions up to a certain amount. And with the scheme's starting contributions so low, it is vital to consider how you can build up a decent retirement income. Philip Smith, head of defined contribution and wealth at Buck Consultants, says: "Even by 2018, when they reach the full minimum amount of the equivalent of 8%, a worker earning £20,000 will only see £1,154 a year going into their pension pot. For these workers, who will probably have saved for decades with the intention of buying an annuity, they'll be lucky to get £100 a week; this is far-removed from a comfortable retirement."
Where is my money invested?
You'll be signed up to a "default fund", invested in different assets such as shares and bonds. While some organisations running the scheme will only offer this, others will give workers a choice of funds. This can allow you to take more risk. You might feel, if you have decades to go before retirement, that you would like to be invested in higher-risk assets.
What about charges?
Many providers are capping their charges for newly auto-enrolled members at 1%; the Association of British Insurers says 0.52% is the average. However, government scheme Nest has been under fire because, while it has an annual management charge of just 0.3%, investors must pay a high charge of 1.8% on every contribution. Jon Dixon, corporate advice manager at IFA Chase de Vere, says: "Many employers will face the prospect of no alternative providers wanting their business so they will be forced to use Nest for their pension scheme, even if this isn't the most appropriate choice for them or their employees." A report by the Office of Fair Trading stopped short of recommending a cap on defined contribution pension charges this month, but it was highly critical of the poor value for money offered by some schemes. Richard Lloyd, executive director of consumer group Which?, says the government must set a cap on all charges for workplace pensions.
Should I still save elsewhere?
By being auto-enrolled, you'll be putting something aside each month, but with current contribution levels don't expect a bumper pension. There are plenty of other ways to save for retirement, such as tax-free Isas.
In any case, millions of workers will not be eligible to be auto-enrolled because they are self-employed, too young, too old or earning too little, and will need to save elsewhere.
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