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Soft compulsion won’t overcome hard objections to pensions.

Soft compulsion won’t overcome hard objections to pensions.

Here’s a question.  What country has the best enrolment into pension schemes where they are not compulsory?  The UK? The USA? Think again.  It’s Canada with 73% enrolment, joint first with the Asia-Pacific region.  The USA comes in at 47%, continental Europe at 45%, and the Latin America region hits 43%.  The UK, frequently quoted as having the best pension savings culture trails in at 40%.[1]

Think about it.  In companies where a defined contribution scheme is provided, usually with an element of employer contribution, only 4 out of every 10 workers bother to join.  What could be the reason behind this?

Is it because 60% of workers don’t want to be comfortable in retirement? Don’t they understand the cost of what they’re throwing away?  Of course they do.  These schemes are generally available to the better-paid worker who is more financially aware than the average worker.

Discussions around the government’s pension changes have all focused on incentivising employees to save, with auto-enrolment being seen as a method of kick-starting the savings habit. It has completely ignored the fact that where schemes are currently available, a substantial majority of people are voting with their feet and walking away from the monetary incentives.

Auto-enrolment is unlikely to make these workers, who have already opted out, suddenly think that pension schemes are a good idea.  We need to understand why this is.

Poor returns, high charges and loss of means-tested state benefits have combined to make current pensioners who saved feel hard done by in comparison to those who didn’t save.  The reward for the average pensioner has been very low and in some cases they have ended up actually worse off than if they had never saved.

And these pensioners have an audience.  Their relatives and friends see, and no doubt hear about, the position they are in and this anecdotal evidence is more eloquent than any government spokesperson urging them to save.

If employees won’t join a scheme now, they are even less likely to join once auto-enrolment comes along and the scheme rules deteriorate.  There were worries when auto-enrolment was first mooted that unscrupulous employers would lower their contributions to the minimum level.

However, even good employers could be driven to do the same.  There is strong evidence from the US that auto-enrolment quickly leads to lower employer contributions as firms find that matching payments for 100% of their workforce is a far more expensive proposition than matching it for less than half.

And soft compulsion is not the way to improve this situation.  Only by directly tackling the whole means-tested fiasco that is pension credits can the government hope to remove distortions from the pension’s arena.  Then self-interest, the only true compulsion, will lead to employees opting to stay in the pension schemes on offer.  Either that, or resort to full compulsion with no opt-out.

Tom Murray

[1] Mercer’s 2009 Global Defined Contribution Survey

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