When politicians decided something must be done about the low level of pension savings, the government bit the bullet with auto-enrolment. But the question remains: has enough consideration really been given to the effectiveness of the solution?
When auto-enrolment came along, all parties leapt on the bandwagon. By adopting it as a policy, they could be seen to be tackling the problem.
However there has not been enough analysis of whether the solution is going to fix the problem.
Since the original idea of auto-enrolment was mooted, the idea that the main reason individuals have not been saving for their pension was down to inertia has turned from a theory into an unquestionable fact.
The opt-out clause, where individuals can decline to be forced to save, was assumed to be a feature that would preserve individual rights, but hopefully would not be used much.
No one is considering what should happen if the opt-out rate is significantly above the government's assumption of 25%.
The problem is most assessments of the system look at it from a societal point of view, but people who will be auto-enrolled only look at it from a personal point of view.
The level of sacrifice by the low-paid is disproportionately greater than for those on high salaries. Even though the initial contributions are set quite low, auto-enrolment will still require an adjusted lifestyle by the low-paid.
Without emphasis on the role state pensions will play in the future and how much it will decline, it is hard to get the fear factor going amongst those on low and medium wages.
Without fear of the future, the main driver to sacrifice spending today for the sake of future consumption is missing.
Given all this, the temptation to opt-out is going to be very high for lower paid workers. The Institute of Directors recently conducted a survey in which a quarter of employers who responded estimated the opt-out rate could be as high as 50%.
This level of opt-out would damage the government's plans to compel everyone start saving.
The government cannot afford to let auto enrolment fail. If it does the government would not be able to reduce the state pension without impoverishing the segment of society that did not save.
The state would end up with the same level of pension funding the whole project was designed to avoid, as the only other alternative would be a means tested approach subsidising those who did not save and penalising those who did.
This will leave the government with choices. It can accept the level of opting out, and hope the take-up rate increases. Or it can move to enforcing savings behaviour by abandoning the opt-out facility.
The compulsion path is the better way to go as it guarantees results. The Australian government has shown what can be achieved by mandating pension savings.
At least the Treasury could make realistic calculations of future pension savings and be in a better position to forecast the likely demands on the state from an ageing population.
So the question remaining is: how long should the government wait before moving to compulsory auto-enrolment?
For undisclosed sum
Entry deadline: Friday 28 September 2018
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