Auto Enrolment - "Free Money"

SevenOfNine

I keep seeing auto enrolment described as "free money" for an employee.

Employers are obliged to participate when their staging date comes round. They must contribute their % share towards the employees pension.

They have additional admin costs themselves relating to this AND must pay a pension company to administer the scheme as well.

How does it follow that the % the company has to contribute plus all the other associated costs is going to be "free" to the employee? Can't just conjure up money - it comes from somewhere..........loaded onto the purchase of goods or services, lower pay rises, whatever.

Employees/consumers might not quite notice it but I'm sure a company is going to find a way of passing the costs on, not just taking it on the chin out of their profits. So perhaps not so "free" after all?!

Your_Hero

SevenOfNine wrote: »

I keep seeing auto enrolment described as "free money" for an employee.

Employers are obliged to participate when their staging date comes round. They must contribute their % share towards the employees pension.

They have additional admin costs themselves relating to this AND must pay a pension company to administer the scheme as well.

How does it follow that the % the company has to contribute plus all the other associated costs is going to be "free" to the employee? Can't just conjure up money - it comes from somewhere..........loaded onto the purchase of goods or services, lower pay rises, whatever.

Employees/consumers might not quite notice it but I'm sure a company is going to find a way of passing the costs on, not just taking it on the chin out of their profits. So perhaps not so "free" after all?!

Always a subjective issue. Nothing is "free" in life if you want to debate about that. There is a cost to everything. A prime example is that NHS treatments are deemed to be "free". But it's not as we pay for this through NI.

One thing is for certain though, if you don't join the auto-enrolment scheme then you will lose out on the employer's payment. So either have nothing, or "free" money from the employer.

bowlhead99

Some of the money will come from the fact that if the company had not paid these expenses, it would have paid taxes on the greater profits it would have had. Of course, then the government loses tax and has to get it elsewhere.

But you're right, you can't just magic more pounds into a closed system without each of the pounds being worth less, without something productive happening. The productive thing that is happening is perhaps the new investment created by the new funds coming in from the pension schemes into the stockmarket, though this is at the the expense of how the owners of the employer would otherwise have spent their own greater profits (in current spending on other things, or their own future investment in the business or elsewhere).

Maybe the business owners, in making greater profits would have spent some of those profits in other countries - so the UK benefits by forcing them to keep some of it here paid out to their employees. Maybe the employees like the free money and become more motivated to work for the employer (due to the effective payrise) and become more productive, so again the UK benefits.

But regardless of that...

The message to employees absolutely has to be "don't turn down the free money". The employers are being ordered to give you money. If you don't want it in your pension, you can't have it anywhere else. It is free if you participate. If you don't, it's off the table. A fool and his free money are soon parted. Opt yourself out and you wave goodbye to the money that the employer would have been happy to give you (ok, happy might be too strong in some cases).

You are right that greater staff costs from pensions might ultimately impact wage rises or prices of things in shops. However, the potential loss of some wages, or even jobs, caused by the employers' lack of free cashflow, is going to affect your job anyhow. Nearly everyone offered the free money will take it. So if you don't take it and 99 people do, your job is still at risk or your wage rises are still at risk because the employer is paying out 99% of the money anyway. So that would not be a reason to turn it down.

In terms of potential higher prices to customers... e.g. the price of a loaf of bread on the shelves; Tesco is not going to increase the prices due to having to give its employees new pensions, because it already gives its employees pensions. Other major employers do too. Therefore the prices of all the things you buy should rise by less than the 'free' 1% you are being offered in your tax-protected investment wrapper. And if you don't take the free money, and everyone else does, the prices will all be going up anyway, you're just left behind on your own crying into an empty bowl.

dunstonh

an't just conjure up money - it comes from somewhere..........loaded onto the purchase of goods or services, lower pay rises, whatever.

Correct. However, the employee is given a choice to join or opt out. Opting out means they dont get that money and opting in means they do at no direct cost to them. Hence free money.

Yes it is simplifying things but you need to use that sort of language with some people. If you try and explain the economics behind it, they will either not be interested or will confuse themselves.

SevenOfNine

Very valid points, thanks for explanations.

Though I don't earn enough to be opted in involuntarily & plan to pack in working in another couple of years, so even if I asked to 'opt in' (assuming I can) any p!ddling % paid in by employer probably won't match interest I can get if I just carry on saving (P/T job & pay too low to even attract NI or tax).

At least I've got a better view of why the term "free money" is used.

Babbawah

potatoehead99 wrote: »

The message to employees absolutely has to be "don't turn down the free money". The employers are being ordered to give you money. If you don't want it in your pension, you can't have it anywhere else. It is free if you participate. If you don't, it's off the table. A fool and his free money are soon parted. Opt yourself out and you wave goodbye to the money that the employer would have been happy to give you (ok, happy might be too strong in some cases).

So, a 63yr old with no prior retirement plans, earning minimum wage, living in rented accomodation, should sign up for one of these then?

Your_Hero

Babbawah wrote: »

So, a 63yr old with no prior retirement plans, earning minimum wage, living in rented accomodation, should sign up for one of these then?

Don't know where you got the quote from, seems like a different thread.

What part of "free money" don't you like?

dunstonh

Babbawah wrote: »

So, a 63yr old with no prior retirement plans, earning minimum wage, living in rented accomodation, should sign up for one of these then?

Yes. No point turning down that free money. Its not as if its going to reduce their benefits.