Eager to have many more employees saving towards retirement, the United Kingdom is in the midst of rolling out a National Pensions Savings Scheme (NPSS) expected to become compulsory in 2012. Under the scheme, employees will have to contribute four per cent of their salary to a personal account while employers pay three per cent and the government contributes one per cent via tax relief.
The NPSS would apply to those not already covered by a similar workplace pension plan and employees would be automatically enrolled in the scheme, but be able to opt out.
Of course the pension crisis is not limited to the U.K. and there has been some talk of introducing a similar scheme in Canada. But would it work on this side of the pond?
Auto-enrolment is definitely gaining traction as a plan design feature, says Shawn Cohen, a senior investment consultant with Hewitt Associates in Toronto, and obviously means people earn more and build for retirement.
“It’s obviously gaining ground from a global perspective and the considerations behind it are excellent. What the U.K. is attempting is noble and to a certain extent required,” he says. “No doubt employees or individuals don’t understand exactly what level is needed, through government or private schemes, and this attempts to answer that question.”
But Cohen is doubtful a similar proposition will make its way to Canada. “It is possible, I would not say it’s likely,” he says.
That’s because, despite the good intentions, Cohen says a scheme such as NPSS has several implementation challenges.
“It really decreases the flexibility of employers and that’s not necessarily a good thing. Given the choice, employers prefer to design their own plans on their objectives.”
More importantly, there is the issue of costs for employers whose existing plans don’t meet certain specifications or have features similar to the NPSS, he says. They are immediately faced with the prospect of a three-per-cent jump in costs which may see them taking away from other areas of the compensation package.
Pension expert Keith Ambachtsheer says the U.K. plan is “very TOPS-like,” referring to his “The Optimal Pension System” that “addresses the human foibles problems through automatically enrolling workers into pension plans, employing ‘auto-pilot’ mechanisms to dynamically adjust individual contribution rates over time, tying the optimal investment policy for individual participants to their age and possibly even suggesting deferment of retiring if necessary, all with the goal of delivering a target pension within reasonable bounds.”
Ambachtsheer, an adjunct professor at the University of Toronto’s Rotman School of Management and director of the Rotman International Centre for Pension Management, says the median British worker should receive a 50-per-cent income replacement rate upon retirement if the lifetime NPSS participation is added to the basic state pension.
“What we know from behavioural research is that people are very passive in this area,” he says. “If you auto-enrol people in something and it’s something they feel they ought to be doing anyway and if they have trust in the specifics of the arrangement, you get 80- to 90-per-cent participation rates.
“Framing is very important. It makes a big difference if you say, ‘Oh, by the way you will be automatically enrolled in this great plan and you can get out of it if you want.’ That’s a different proposition from saying, ‘You can say yes or no upfront.’”
But three-quarters of U.K. employers believe the scheme will not solve the pension crisis (while 21 per cent are unsure), according to an
/Axa Sunlife poll of 574 respondents in June.
“The impact of the introduction of personal accounts, auto-enrolment and compulsory contributions for both employer and employee looks set to be the subject of debate for quite some time,” says Debbie Lovewell, deputy editor of
, a magazine in the U.K.
“Much speculation over the past year, however, appears to have done little to convince employers that these proposals represent the answer to the country’s pension problems.”
To actually implement something like this, you have to deal with employer resistance and get the community onside, says Ambachtsheer.
“One of the responses is you may have to hold back on current compensation. If it’s driving your labour costs up too high, you may have to hold back on the next couple of increases in wages. So there are different ways you deal with that kind of resistance.”
A 2006 report from the Pension Commissions in the U.K. acknowledged criticism that the NPSS proposal might encourage “leveling down,” meaning companies reduce employer contribution rates to combat costs: “Since average employer contribution rates to defined contribution schemes are presently about six per cent, this risk clearly exists.”
But the report said this risk is still less than the risk of doing nothing and “the NPSS is not intended to be a replacement for good occupational provision and should not be presented as such. It is a proposal for a low-cost pension saving scheme where there is not good employer-sponsored pension provision.”
Acknowledging there are still details to be worked out, Ambachtsheer says such a scheme for Canada is not necessarily a long way off.
“It depends on whether you can put the right combination of interest groups together plus the political process to make it happen. It’s going to require focus and leadership to pull this off,” he says.
“This is not a great win for our for-profit financial intermediation industry; they like it the way it is. You can charge 2.5-per-cent fees on $700 billion of mutual fund assets — lovely if you’re the beneficiary. So that’s part of what we’re going to be fighting in Canada, to get that fee down for most of these people… and that’s going to put a lot of noses out of joint, so no this is not a slam dunk at all.”
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