UK may reform pensions to boost auto-enrolment uptake
The UK pensions minister is set to review auto-enrolment into pension schemes following concern that opt-outs will spiral once contribution rates increase.
Richard Harrington MP, parliamentary under secretary of state for pensions, said that while auto-enrolment “has gone very well” and “the drop out rate is lower than originally thought” it has not been truly tested given the low contribution rates currently in place.
The auto-enrolment reform means that UK workers are automatically put into a pension scheme unless they formally request not to be.
Contribution rates will soon ramp up from the current 1% to ones that will provide meaningful improvements in living standards to members on retirement: “The real test is when it goes up to 3% and then 5%," said Harrington, who was appointed in July 2016 by the incoming prime minister Teresa May.
“I am concerned that the hard stuff is coming. We are now dealing with an exponential growth in the amount of contributions.”
The employee contribution rate is set to increase to 3% in 2018 and 5% in 2019.
“I am not complacent about that at all and I am not predicting disaster we have a lot of marketing to do to explain to customers that this is the right product for them.”
There will be an official review of auto-enrolment in 2017. “It will be time then, once it is bedded in, to really look at what is going on.”
While he stated that “I understand perfectly well the background as to why there is the three month opt out” he did not reaffirm it will remain in place.
The review will look at the success of auto-enrolment following efforts to educate, such as through the Pension Wise television campaign. He stressed it was the job of the government and pensions industry to educate workers: “People have got to understand pensions.”
“We have to de-jargonise to get the message across. It’s not the government’s money, it’s not the pension company’s money and its not the employer’s money,” adding that the message to get across is that “It is your long-term savings. It’s your own account”.
“I do not take auto-enrolment for granted at all.”
Ahead of the review he has not set out any options. However, the most obviously effective option would be to introduce compulsion, as is the case in the Australian Super system, forcing people to save regardless of their willingness to do so.
Such a move would massively increase the AuM in institutional accounts. Less extreme possible measures could include so-called nudging workers into saving.
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