The introduction of auto-enrolment, which ensures all UK workers will eventually be enrolled in a workplace pension scheme unless they specifically opt out, is designed to create a system that could start to tackle the looming retirement savings crisis that many people face.
But the UK has some way to go before it can develop a structure that will bring it into line with other European countries. In its Melbourne Mercer Global Pensions Index, conducted in October 2012 before the initiative had started in earnest, Mercer ranked the UK seventh in the list of the world’s top national pension systems.
The study put Denmark, where a basic state scheme is supplemented by a fully funded defined contribution (DC) scheme and mandatory occupational plans, in top spot, but the Netherlands, Australia, Switzerland, Sweden and Canada also ranked above the UK.
There are, perhaps, lessons the UK can learn from some of these countries. Tim Middleton, technical consultant at the Pensions Management Institute, points to the models that are operated in Denmark and the Netherlands. “Members of DC schemes there have significantly better retirement outcomes than in the UK,” he says.
He puts this down to the efficiencies industry-wide schemes, backed by collective agreements with work councils, are able to achieve through economies of scale, as well as the fact that risk is shared between employer and members, similar to the “defined ambition” approach the UK Pension Minister Steve Webb has suggested could work well here.
There is a very strong feeling in the UK that the market will find a fair price and there’s no need for public intervention
“I’m a strong believer in collective DC as a means of achieving better standards of risk-sharing and providing a vehicle which is more effective in providing good retirement outcomes for people,” says Mr Middleton.
This is a matter that splits opinion, however. Paul Kelly, director of international benefit consulting at Towers Watson, points out that this has recently seen pension payments reduce in the Netherlands as schemes have struggled to meet their obligations.
“Those reductions are significant and apply to pensions in payment, as well as deferred employees, so this is real pain felt by people in retirement,” he says. “I find that quite difficult to rationalise.”
Others believe the UK will eventually need to make pension contributions compulsory, along the lines of Australia or Chile. “Auto-enrolment means higher compliance costs than a compulsory model, where everybody is in and it’s very hard to get out,” says David Harris, managing director of Tor Financial Consulting and a former Australian regulator who was involved in bringing in compulsion.
He expects the UK to experience higher opt-out levels as smaller companies enter the system and warns of workers acquiring small pension pots with multiple employers as a potential flaw.
The Swiss system, which is also based on compulsion, might provide a solution. “They have a clearing house approach to small pots so, if you move from job to job, your money always leaves the employer’s fund until you retire. That seems to work quite well,” says Mr Kelly.
Stefan Lundbergh, head of innovation at Dutch advisory business Cardano, raises the issue of charges, which could potentially restrict the amount of growth funds see. He highlights the Swedish system, where the government operates a low-cost model, and the Dutch schemes run by social partners as potential models for the UK to follow.
“There is a very strong feeling in the UK that the market will find a fair price and there’s no need for public intervention,” says Mr Lundbergh. The National Employment Savings Trust (NEST) can help to keep costs in the UK under control, he adds, but group pension plans or SIPPs (self-invested personal pensions) generally command much higher charges.
Other countries are watching how the UK’s experiment with auto-enrolment progresses. Ireland, in particular, is resurrecting plans to implement a similar scheme, says Adrian Daly, chief executive of Irish provider PensionSource. A debate is already looming over the role the National Treasury Management Association would have in managing the assets and any tips from across the Irish Sea are likely to be seized upon.
Mr Kelly, meanwhile, says the United States, which currently operates the voluntary employer 401k system, might toy with the concept of auto-enrolment. Mr Middleton believes other European countries, such as Spain, France and Italy, which have traditionally provided generous state benefits but may not be able to in the future, might also watch with interest.
Yet whether auto-enrolment will make a real difference to tackling the ticking time bomb of pensioner poverty in the UK is still uncertain. “It’s important not to see this as a panacea,” says Mr Middleton. “But it’s a start.”
