Billed as the biggest shake-up in UK pensions for over a hundred years, auto-enrolment will see up to 11 million employees contributing to a workplace pension over the next five years. Designed to remove the barriers to joining a pension scheme, the reforms are seen as crucial to closing the UK’s growing ‘savings gap’ by encouraging more people to save for their retirement to avoid poverty in old age.
From 1 October this year, the reforms began being phased in, starting with the country’s largest companies. By the end of this year, companies employing over 50,000 people must enrol workers, and by April 2017 all UK companies, even those with only one employee, must comply.
The number of employees that choose to remain in the pension will be an important determinant of auto-enrolment’s success. The challenges faced were highlighted in a recent report by Aviva which found that only 43% of employees without a pension said they would remain in the scheme once they were automatically enrolled, while 21% were undecided and more than a third (37%) said they will definitely opt out.
Another key ingredient is the introduction of a flat-rate state pension – vital to allaying concerns that auto-enrolment will penalise savers who would otherwise qualify for means-tested benefits. Despite rumours that the Prime Minister has personally intervened in the plans and demanded a rethink, the Pension Minister, Steve Webb, speaking at The Professional Pensions Show in October dismissed speculation and confirmed that the flat-rate was on track and set for implementation early in the next Parliament.
As with any significant reform, side issues have arisen. With the advent of auto-enrolment, the potential exists for employees to build up a series of small pension pots in a variety of employments. Indeed, the Department for Work and Pensions (DWP) estimate that without change, there will be around 50 million dormant workplace defined contribution pension pots within the system by 2050, and that over 12 million of these will be under £2,000 (in 2012 earnings terms). This situation is also mirrored in Australia, with workers accumulating multiple superannuation accounts. The Australian government’s Stronger Super initiative will see the auto-consolidation of smaller funds that have been sitting idle into the largest most active fund.
The burden of these small pots is compounded by the fact that systemic barriers, like cost and complexity, prevent people from moving and consolidating their pensions into one place. A joint industry working group is exploring the options available to tackle these inefficiencies and agree on a solution that allows employees to keep track of their pension savings.
An automated ‘pot follows member’ approach has government backing – however, the scheme has been met with criticism from industry bodies, claiming that workers who change jobs risk losing up to a quarter of their pension.
Whatever the framework eventually agreed upon, technology will feature prominently with automated systems that improve back office efficiency. Technology has a fundamental part to play in providing a consolidated view of an individual’s pension wealth, increasing transparency and addressing small pot concerns – on both sides of the world.