Auto-enrolment: The game-changer?
Will the official launch of auto-enrolment truly represent a 'new dawn' in the UK? Jonathan Williams investigates.
The reform could be a "game-changer", according to the National Association of Pension Funds, is a "truly historic change" if pensions minister Steve Webb is to be believed and represents a "new dawn" according to employer lobby CBI, wholeheartedly backing soft compulsion.
All three are, of course, referring to the official launch of auto-enrolment in Britain. As of today, the UK's largest companies will begin entering employees into their pension funds - and many employees, for the first time, will have to make an active decision to forsake this additional income in the shape of company contributions.
The principle of auto-enrolment is no doubt sound, although it could be said that Australia was wiser in pursuing the more forceful policy of compulsion.
Nonetheless, the NAPF's chief executive Joanne Segars is right to warn that the country is "drifting towards an iceberg" with its lack of sufficient pension coverage. "Crucially, this reform will reach those who have no pension - the young, the low-paid and those working for small businesses."
Now that the reform has arrived, and we can hopefully witness an estimated 9m benefit from a contribution rate of 8% - split over workers, employers and tax relief - attention should turn to the next step of the reform, until now only properly debated within the pensions industry, namely assessing if the rate is truly adequate.
Discussing the National Employment Savings Trust's (NEST) advertising campaign 'Tomorrow is worth saving for', chief executive Tim Jones said its goal was "all about small, affordable pleasures, not world cruises or champagne lifestyles".
While this is a wise approach for the auto-enrolment scheme to take given its target audience of low income earners likely to be new to pension saving, even wealthier earners may be hard-pressed to build up a sizable pension pot on 8% contributions in a volatile equity market.
Fraser Smart, managing director at Buck Consultants, shares this pessimism. "Many of the millions who do start saving will be paying into schemes at levels that will not provide an adequate pension at retirement," he notes, calling for statutory minimum contributions to double over time.
However, escalating pension contribution - at least to the 12% levels seen in Australia but potentially as high as the low 20s seen in many Dutch schemes - is the best way to ensure a decent outcome in retirement.
Additionally, the UK government must seriously consider how best to create this outcome, and whether the consolidation of pension pots through a 'pot follows member' approach is the best way when savings could follow a worker into a lesser scheme, rather than being consolidated into NEST.
As part of this, it should ignore the resistance of vested interests in parts of the pensions industry to allow transfers into and out of NEST, allowing it to compete fully and create a fund able to generate high outcomes at low cost.
Here the government must think of the long-term gains of a successful and strong pension fund such as NEST in alleviating the fiscal impact of an ageing population, rather than the short-term gain of keeping certain lobby groups appeased.
If these points can be addressed, then auto-enrolment may truly be the game changer predicted, rather than simply a stepping-stone towards a better future.