Institute for Fiscal Studies is unconvinced by government pension reform

The new government scheme will see employees automatically enrolled into a workplace pension, and will affect workers across the UK. In most cases, this will be the first time that their employer has directly contributed to their savings.

If workers are over the age of 22 and are not already involved in a pension scheme, they will see a portion of their pay packet diverted into a pension plan. The employee will initially contribute 0.8% of their wage to the pot, whilst their employer will be legally obliged to contribute a further 1%. A tax relief of 0.2% will make up the 2% going into the pot.

The scheme will roll on until the employee is contributing 4% of their wages, the employer is contributing 3%, and tax relief makes up a further 1%.

The Department for Work and Pensions has estimated that this will result in around 600,000 more people being enrolled in pension schemes by the end of the year.

Steve Webb, the minister for pensions, said, “If we can get between six and nine million more people saving in a pension by the time all employers are in, that is a genuine savings revolution.”

This said, economists from the Institute for Fiscal Studies (IFS) are not convinced about how large this “revolution” will actually be. They have argued that government figures have so far been unclear and not representative of how things will actually turn out.

It argues that some employers may lower pay rises to compensate for contributions, which will have a knock on to workers’ savings.

The IFS report said, “Simply getting more people to save in a pension will not achieve the government's overall objectives if it is also accompanied by a reduction in the amounts saved into pensions or saved in other forms.”