Achieving a lasting political consensus on any issue, in any democracy, is easier said than done. But it’s exactly what happened in one important aspect of UK pensions policy over the past 10 years.
Back in 2006, the Pensions Commission, under the independent oversight of Lord Adair Turner and featuring members from across the political divide and the industry–consumer “gap,” issued its final report—and UK workers and savers are still feeling the (overwhelmingly positive) effects of this endeavor.
From Paper to Practice
The Pensions Commission set in motion the introduction of automatic enrollment (AE). All workers between ages 22 and the state pension age (currently 65 for men and rising to 65 in 2018 for women) who earn over a certain amount (currently approximately $14,600 per year) must now automatically be put into a workplace pension plan by their employer. People who do not want to save have a right to opt out, so no one is forced against their will.
The rationale for pursuing this policy was due to a combination of inertia among workers and less generous employer funding of pensions. The decline of final salary (defined benefit) plans was beginning to have an impact on retirement incomes, and with rapidly declining employee participation in defined contribution plans, there were genuine concerns for future income levels among pensioners.
For their part, many workers wanted to save for their retirement; they just never quite got around to signing up. This “soft compulsion” approach was viewed as a win-win for individuals and for the UK economy.
Lights, Camera, Action
AE began rolling out some 6 years later in 2012. What a year it was in Britain: the Queen’s Diamond Jubilee, hosting the Olympic Games, more pension saving, the most illustrious year of modern times—and in part thanks to Lord Turner.
Over the more than 3 years since, a gradual expansion has taken place. AE started with the largest employers and has worked its way down the ladder, so that by now, all large and medium employers have to enroll their staff into a workplace pension plan (unless the worker opts out). The first small employers are now beginning to do the same—and, arguably, this is where the real challenges begin.
The contribution rates started out—and still are—quite low, although they will be phased up in 2018. Currently, the individual, employer, and government each contribute a bit—up to a total of 2 percent of the worker’s qualifying salary (approximately, earnings between $8,500 and $61,000). This will rise to 8 percent in 2018.
Research shows that in many cases these contributions are not high enough to deliver a decent income in retirement, and there is some debate about whether or how contributions should be further increased.
But so far, it’s been a resounding success. Opt out rates are about 10 percent, way below the original estimates, indicating that there really is an appetite for retirement saving, perhaps more than anyone anticipated. And the political consensus, remarkably, has held throughout.
It seems that everyone, from politicians to people, really gets pension saving!
Challenge for Employers
Over the next couple of years, every small employer in the country will have to auto-enroll their workers. This is likely to get interesting—it’s one thing for large employers, which are already likely to have a pension plan for new savers or have the resources to set one up, but quite another thing for smaller businesses that are new to this world.
For pension plans, too, there are particular challenges. Smaller businesses are likely to be less profitable customers, and many plan providers have introduced additional charges. Employers are free to choose which plan to use, and there’s a guarantee someone will offer a plan—the National Employment Savings Trust (NEST) was established with a government loan and a universal service obligation, so it is obliged to take their business, and it does not charge extra whatever the size of business. NEST is an important component of the success here.
With a bit more help along the way through increased contribution levels, we’re optimistic that everyone will reach a decent level of retirement income.
And it seems that 10 years on from his report, Lord Turner’s vision is all set to become a reality… and the consensus still remains.
about the author
Christopher Brooks is senior policy manager for consumer and community at Age UK. He manages the work of a team across a diverse range of policy issues as well as leads Age UK’s public policy work on private pensions, employment, and skills.