Auto enrolment – the requirement for an employer to automatically enrol its employees onto pension schemes that it provides and contributes to – was introduced on 1 October 2012.

Some months ago, I attended a talk on financial management.  The presenter asked how many of us had pensions and only half the class raised their hands.  He tut-tutted and said, “You’re basically throwing away free money from your employer.”

The Government is aware that many of us are not saving sufficiently for our pensions.  It therefore decided to introduce auto enrolment, which requires employers to automatically enrol employees onto pension schemes that they provide and contribute to.

Since 1 October 2012, the largest employers – those with more than 120,000 employees – have been required to automatically enrol all qualifying employees into a pension scheme.  An eligible employee is any worker between the ages of 22 and 65 who is earning more than £8,105 a year.

Auto enrolment is being introduced on a staged basis for progressively smaller employers.  There are monthly staging dates when the auto enrolment requirement will kick in for a new batch of employers, running until June 2015 when employers with fewer than 30 employees will be required to comply.

Given the benefit of belonging to a pension scheme you would think that each employee would jump at the chance to join.  However, there will be some employees who decide they cannot afford to make pension contributions.  Such employees will only have 30 days after enrolment in which to opt out of the scheme.

Drawbacks for employees

Despite the obvious attractions of auto enrolment, there are some potential pitfalls.  Employees who decide to remain in the scheme should be aware that they may be enrolled on schemes that have high charges – fees that cut into their pension pots.  Employees should check whether their employer is using such a costly scheme.

With this in mind, a number of low-cost pension providers are targeting the auto enrolment market.  They include NEST (National Employment Savings Trust) and NOW: Pensions.  Such schemes benefit from having low charges, but they lack flexibility of investment choice.

At the other end of the scale, employees who already maximise their contributions to private pension plans should take care that they do not exceed their annual allowance, currently £40,000.

Caveats for employers

Employers should be wary too.  Some might not realise that there are a number of contingent duties that accompany the auto enrolment requirement:

• Employers must be careful not to ask prospective employees whether they intend to opt out of the scheme.
• They must not offer any financial inducements to entice an employee to opt out.

HR departments should be made aware of these duties and required to abide by them.  The Pensions Regulator can issue financial penalties to employers who breach the duties above.