The National Employment Savings Trust (NEST) kicks-in for the country’s largest employers in October and will gradually widen to include smaller companies as well. The scheme has been set up as a catch-all for companies that do not currently have an occupational pension plan.
It is designed to combat the growing problem of poverty in old age: research from Scottish Widows suggests that one-fifth of the population are failing to save for their retirement.
Improvements in healthcare and standards of living also mean that people are living longer and need more funds to survive.
Critics of the scheme say that it is too expensive and structured in the wrong way so that volatility remains low for the youngest investors who can afford to take on the most risk.
In addition, auto-enrolment will take money out of people’s pockets when they are already struggling against the backdrop of low interest rates, high inflation and a double-dip recession.
However, Tom McPhail, head of pensions research at Hargreaves Lansdown, says that anybody who doesn’t like the scheme can simply opt out.
"Younger people or people on lower earnings may not have much margin in their budgets to account for the contributions but they are free to say no," he explained.
"Behavioural economics show that most people will learn to get by."
"We’re not going to be able to fix the problems of the pensions crisis without auto-enrolment. The biggest question is how the scheme can go even further to create a pensions system which is right for purpose, but this is an important step to resolve one of the major crises facing this country."
Recent research from the insurer Aviva found that 68 per cent of employees were unaware or unclear about the upcoming changes to the way pensions are managed.
"More needs to be done to communicate to the population so that people know what is going to happen to their money but that is not the sole responsibility of the Government," commented McPhail. "This industry should be doing more to help."
Phil Smithyes, managing director of Crowe Clark Whitehill Financial Planning, believes that auto-enrolment is an important start but does not go far enough to safeguard people in their old age. "The combination of increased longevity, coupled with historically low interest rates and bond yields, means that individuals suffer a ‘double whammy’ effect with the cost of purchasing retirement income being double what it was 10 years ago," he said.
"Individuals need to work with their financial planner to map out their retirement provision. It is fair to say that moving forward, the onus is firmly on the individual to fund their retirement rather than relying on the state."
"Focusing now on structured planning and appropriate investment strategies will help lessen the burden later in life," he finished.