Auto-enrolment as a 'stealth tax'
The UK's auto-enrolment reforms could fail before launch if press coverage leading up to the rollout confuses the soft compulsion system with a new stealth tax, argues Jonathan Williams.
Guaranteeing the success of the UK's auto-enrolment reforms will be no small feat, even if both employers and employees can be rallied in support of the new pension system. The National Employment Savings Trust (NEST), a cornerstone of the 2012 reforms, is all too aware of the situation and to this end has commissioned studies examining the attitude of its core market to savings and loss, as well as pushing its board members into the media spotlight as de facto spokespeople for Adair Turner's vision.
However, the organisation faces a number of hurdles, with one being a public misconception that auto-enrolment is a form of stealth tax, rather than an old-age nest egg. An interview in last week's Independent with chairman Tim Jones said the first most employees would know of the new pension system would be when they saw money "being taken from their salaries to pay for contributions into NEST".
Of course, such a description - purposely or by accident - glosses over that while an employee will be compelled to enter the scheme selected by his employer, he will nonetheless be given the option not to save at all through the arrangement. Therefore, unless the employee ignores advice and warnings, he is unlikely to open his pay cheque one day and suddenly see a contribution-sized hole within.
The perception of an additional tax, taken without informing workers, will not help reforms at a time when many of those affected by auto-enrolment have seen salaries frozen with higher than usual inflation eating away at their buying power, making them less inclined to go along with the contribution.
NEST realises these problems and last month unveiled two studies that examined its target market's reactions to volatility, which also set out to find the best way of visualising any gains or losses made to savings. The approach suggested was to display, from left to right, employee contributions and employer contributions, followed by the increase or decrease - allowing for any losses to affect first the money gained from the company or government.
With such complex advance work needed to guarantee people do not flee the nest in advance, it is important that the educational push ahead of auto-enrolment explain the advantages of pension saving, not simply focus on the money lost in each month's pay cheque.