Auto-enrollment shakes up UK pensions
A new UK initiative to get greater numbers of people saving more for their pensions aims to avert the imminent financial crisis posed by an aging population
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In October, Prince Charles gave a speech to the National Association of Pension Funds in which he suggested the UK’s pension industry should turn away from quarterly capitalism and instead address sustainability issues.
The event coincided with the first anniversary of the UK’s auto-enrollment initiative for pensions, which stipulates that the employers must automatically enroll workers in a pension scheme if they fit certain criteria. By, most of the working population should be saving in a private-sector pension scheme. The new law was introduced because of government fears that the growing number of pensioners will eventually create too much of a burden on state pensions.
The Department for Work & Pensions warns that by there will only be two workers per pensioner, compared with three and ten in. The government aims to increase the number of individuals saving in a workplace pension plan by around 8 million, funneling an estimated extra £11 billion ($17.6 billion) a year into pension schemes. So far, 1.6 million people have been enrolled. Auto-enrollment plays on people’s tendency towards inertia
Auto-enrollment is also the biggest shakeup in the UK’s pension industry for decades. The government introduced reforms in order for private pensions to become simpler, cheaper and more accessible. It’s also running a nationwide communications program to educate the public, featuring ads on the main television channels. These measures are making pensions a mass-market financial product, like car insurance and bank accounts.
Setting up a NEST egg
In order to shake up the pensions market and ensure that there is always a provider of last resort, the government launched the National Employment Savings Trust (NEST), a not-for-profit organization with a number of innovations, including retirement date funds. Its asset allocation changes according to economic conditions and how far an individual is from retirement.
“Auto-enrollment is having a beneficial impact. It is creating lower-cost pensions,” says David Pitt-Watson, a spokesperson for the Royal Society for the Encouragement of Arts, Manufactures and Commerce. “NEST has been particularly good in leading the way.” Savers can take their NEST accounts with them as they change employers, and some companies offer NEST pensions alongside other alternatives. Additionally, a major UK pension provider has thrown down the gauntlet by cutting its fees and even challenged the government to lower its 0.75% fee cap to 0.5%.
Industry experts such as Henry Tapper, director of First Actuarial and a founding editor of Pension PlayPen, see NEST as a good default pension scheme for small businesses, given its simplicity and ease of use. Graham Vidler, director of communications and engagement with NEST, says the organization has deliberately developed tools to make the process easier for small employers. “The big challenge is ensuring employers and intermediaries know what they need to do,” he says. He advises smaller firms to start preparing at least six months before implementation. But one year on, has it worked?
Many experts believe that auto-enrollment in UK pensions has been a success.
Outstanding success
The government expected one-third of employees to quit; instead, only 9% have left the scheme. “So far it has been an outstanding success,” says Tapper, whose website Pension PlayPen is dedicated to helping small businesses with auto-enrollment. He notes that employee acceptance has been good, and that the government and employers have done a good job explaining the scheme.
The Trades Union Congress, which represents 54 unions, also hails it as a success. “Auto-enrollment plays on people’s tendency towards inertia,” says Neal Blackshire, benefits and compensation manager with restaurant chain McDonald’s UK.
“Besides, people know that they should be saving for their old age.” McDonald’s employs 37,000 people in the UK, with 35,000 of them paid hourly. There are another 57,000 working in franchised restaurants. To date, the fast-food chain has auto-enrolled over 1,150 salaried employees and 11,500 on hourly pay. The opt-out rate has been 3.48% and 2.15% respectively.
Drawbacks and difficulties
Implementing the scheme has been difficult for companies with large workforces. Blackshire says that several years of preparation and close cross-departmental cooperation were required, and McDonald’s brought in outside consultants to help communicate auto-enrollment to its workers to make sure they understood it. There is some concern that opt-out rates will rise once small companies have to implement the scheme.
Firstly, they may be less financially able to bear the burden of partly funding employee pension plans. Secondly, they often have very little in-house knowledge about running pension schemes. “There’s been a lot of scaremongering about the costs of autoenrollment, particularly for small businesses,” says Tapper. “But I think it’s overdone. It is not that difficult to set up.”
He notes the increasing numbers of providers launching products to make implementation easier. The scheme may even have caught the mood of the nation: “I think the financial crisis has changed many consumers’ priorities from being in debt towards wanting to save,” says Vidler. “People aren’t spending so freely.” Nonetheless, there is some expectation in the industry that opt-out rates will probably increase over time. But so far, so good.
