No rush for auto enrolment
As part of their commitment to turn around their economies, Spain and Portugal have tackled pension issues, both by reducing expenditure and by taking the first steps towards making retirement systems fairer and more efficient.
Many experts in those countries suggest that automatic enrolment should and will be on the lawmakers’ agenda over the next years. The success of the UK’s automatic enrolment programme is seen as proof that making pension investment quasi compulsory is a win-win strategy to tackle the pension emergency.
Yet replicating the UK success in Spain and Portugal would be difficult, and there are a number of reasons for that.
First, although the economies of the two countries are recovering, their companies and consumers are still far from a point where they can unlock excess capital to make pension contributions. Unemployment is still high and it will take time for both countries to see the effect of the recent supply-side reforms, especially in terms of consumer spending. The proportion of opt-outs could be much higher because their disposable income is far lower than in the UK.
Second, a much higher concentration of SMEs in the two countries also means opt-out rates would likely be higher, as is forecast to be the case in the UK.
Third, supply-side reforms (pension, labour or fiscal) that have been approved or are being discussed do not seem to include explicit incentives for companies to set up pension plans. Contributions through automatic enrolment without incentives would be seen as a fiscal burden.
A fourth reason has to do with governance in the pension industry. Pension fund trustees are not required to show qualifications in pension investment. Also, responsibility of investment decisions lies with the separate entities that manage pension funds rather than trustees themselves. Implementing auto-enrolment would at least require a moderinsation of governance rules.
Finally, while UK auto-enrolment has been a success so far in terms of opt-out rates and asset growth forecasts, the country is still grappling with the issue of post-retirement outcomes, which depend on the supply of financial education, advice and retirement products in the market.
These aspects are equally critical for determining retirement outcomes for Spanish and Portuguese employees. Lawmakers should not miss the opportunity to reflect on them before designing a programme aimed at compelling people to save for a pension.