Due to come into effect in October for companies with 250 or more members, with start dates staggered according to company size, the auto-enrolment scheme aims to increase participation in pensions.
And it will do that, undoubtedly. At present many people are not enrolled in pension schemes, particularly those in smaller companies which don’t offer it as part of a benefits package.
However it has also provided a lot of food for thought regarding the potential problems of the initiative. Much has been written about the impact on businesses, particularly small companies, who will find that their administration and outgoings increase.
Obviously it will be a good thing if large a percentage of the population participates in pension schemes and saves adequately for retirement. As actuaries though, we are interested in the wider effects of the scheme. The ratio of workers to non workers is falling, so there are fewer people contributing to pension schemes. The "support ratio" – the number of people paying into pensions vs the number of people withdrawing – is also falling, due to the aging population and unemployment levels. Additionally, many employed people are not enrolled in pension schemes.
Therefore pension contributions are necessary. However there has been debate over whether auto-enrolment will solve the problem of the pensions deficit.
The onus will be on businesses to select the most appropriate scheme for their workforce, and while there are tools and specialists who will be able to assist with the options are not necessarily easy to navigate. This means there is the potential for people to become enrolled on unsuitable schemes because they simply trust their employer.>
Then there is the danger pointed out by experts including advisory group AWD Chase De Vere, that the minimum contributions which many employees will make via auto-enrolment will not be sufficient to sustain their retirement.
Jon Dixon, the company's Corporate Advice Manager, said that;
"Someone investing over a 46-year period from the age of 20 may receive a pension income of less than £500 each month in today's terms - for shorter terms these amounts are considerably lower…Those investing from the age of 30 will receive £292.08 in today's income, while those who start saving at 40 will receive just £163.87 in today's money."
Financial Education and Literary Advisers chief executive Blake Allison, who advises US government agencies on financial literacy and the use of behavioural finance, echoed these words and commented that it will be harder to get employees to make voluntary contributions once they're auto-enrolled as they will believe, perhaps wrongly, that they are doing all they need to do.
He has called for employers to educate their workforce not just on the importance of making voluntary pension contributions, but also on wider financial management so that they can free up additional income to save for retirement. He recommended that the UK follow in the footsteps of America and use tax breaks as incentives for companies to provide financial education, in order to promote a more financially secure workforce who will have more disposable income and be less reliant on state support. (Visit http://www.professionalpensions.com/professional-pensions/news/2195923/employers-urged-to-educate-workforces-before-ae#ixzz22rjNJY8n for further reading)
This ties in to our last blog post about the role of mathematics education, which touched on the importance of teaching people how to understand their own finances, plan for retirement and put their finances in the context of the wider economy.
This can increase pension contributions and savings, reducing the pressure on the state and younger population to support the elderly, as well as free up disposable income which can be put back into the economy.
Despite the regulation changes, demand for pensions actuaries has fallen in the past 6 months. However there is a trend emerging for strong pensions actuaries to move into risk and insurance actuary jobs to use their skills in these fields, particularly ahead of Solvency II legislation coming into force.