The government’s forthcoming automatic pension scheme has been dealt another blow this week. According to research carried out by the consultancy Hymans Robertson, 40% of people earning under £15,000 per annum will exercise their right to opt out of the scheme. This will be disappointing news to the government, because this is exactly the income group the scheme is aimed at.
The Pension Commission might be surprised at this survey, because it undermines the fundamental theory behind the automatic pension system. As the intellectual architects of NEST, the Pension Commission decided to harness the inertia that surrounds pension savings (or the lack of them) in the UK. The theory goes that if you invite people to join a scheme they won’t bother, due to the hassle of filling in the forms and a natural unwillingness to receive less in their monthly pay packet. On the other hand, if you involve employees automatically they will supposedly stay in as members by default, and continue to allow deductions from their salary to be made.
The National Employee Savings Trust (NEST) will be introduced in 2012, when employers will begin automatically enrolling their employees into the scheme. The default employee contribution will be 4% of their salary, with employers putting in 3% and the government a further 1%. NEST will not be 100% rolled out until 2016. Given that proposals to form it were initially announced in 1998, critics claim that hundreds of thousands of savers will have missed out on the opportunity to begin saving for their retirement in an easy way.
The scheme has also come under fire when the charges were introduced. Whilst the annual management fee is only 0.3% – admittedly a fair price compared to privately run pension schemes on the market – it is the upfront charge of 2% on contributions to be levied to pay for the start up costs that has attracted criticism. The savers of today will end up paying for the savers of tomorrow, and it is feared that the levy itself will act as a deterrent to new members signing up. Perhaps if the government announced how long the levy would continue for, savers might be prepared to try the scheme. Presently however there is no information about this in the public domain.