The UK has a workforce of 29 million people, and it is estimated that seven million people are under saving for retirement and the Workplace Retirement Income Commission recently reported that these private sector workers faced a "bleak old age" because they fell through the cracks of pension provision.

To tackle this, the government is introducing National Employment Saving Trusts (NEST) between 2012 and 2016. Under this employers will have to automatically enroll all eligible workers in a qualifying pension scheme and make 3% contributions to their plan, with the employees contributing another 4%.

This plan was originally unveiled by the government in 2006, but economic conditions have changed since then so is it still the correct thing to?

SME’s are currently facing poor levels of demand from both the domestic and export markets, and as a result are having to examine all costs and ensure that they at a minimum. This has not been helped this year by inflation going through 5%, and the increase of 2.5% in VAT in January. If SME’s are faced with a 3% rise in their wage bill, will this then effect inflation further, or could this lead to a rise in the level of unemployment?

The rise in the level of inflation is also putting pressure on household income, with an estimate that the average income could fall by 3% this year, the steepest drop since 1981. This would take households back to 2004-5 levels. Therefore what effect would an additional 4% cost put on already tight purse strings? The resulting drop in consumer confidence and demand would add to the cyclical effect and could result in further rises in unemployment, and a strong possibility of another recession. 

Could then the introduction of NEST’s just end up being a paper exercise and more red tape for SME’s to jump through? Employees do have the option to “opt out” of the scheme, and given their current financial pressures many will probably do so, as they cannot afford to a 4% drop in income.

Yes the government need to introduce a plan to improve the retirement of future generations, but given the state of the economy, and reducing future growth projections, surely now is not the time to do it

About the Author

Sarah McGhee

Sarah McGhee is a financial advisor from the South-East, who regularly blogs about upcoming changes in the banking world.