David Prosser: Auto-enrolment becomes a headache

Outlook It is 16 months and counting before Britain's mini pensions revolution beings. The largest companies, those with 120,000 staff or more, must introduce auto-enrolment, whereby staff automatically join the pension fund, unless they opt out, from October 2012.

Not a moment before time, one might say, given the latest data from the Office of National Statistics. It said this week that just 39 per cent of men and 28 per cent of women are paying into a pension scheme in the private sector, down from 52 per cent and 41 per cent respectively in 2002.

Still, while it is good news that so many workers are about to become savers, there's no evidence their employers are prepared for this sudden influx to the company pension scheme. Hymans Robertson, a pensions adviser, says today that fewer than one in five large companies have worked out what the new system might cost them, which suggests employers are woefully unprepared for changes that are potentially expensive and disruptive.

The costs of auto-enrolment are twofold. There is the administrative expense of ensuring payroll and pensions systems can cope with the new arrangements; then there's the cost of paying contributions for all those extra scheme members, at a minimum of 3 per cent of salary under the rules.

To some extent, the second cost will determine the first. Employers will need to make a judgement about just how many of their staff will opt out under the auto-enrolment regime (strict rules prevent them from offering any inducements to do so). Many of those who think participation will be very much higher than it is now will want to think twice about simply extending their existing pension to new joiners, preferring instead to offer other tiers of benefits.

Redesigning pension schemes may reduce the burdens of wider participation, but it will carry significant one-off costs, even assuming it can be completed in time for the new regime. There are no easy answers, in other words.