As life expectancy increases, concerns over how individuals will fund their old age become a major policy issue for all governments. Basic state pension provision is too low to cover living costs; depending on it alone means poverty in old age. Personal- and employee-pension plans need to cover the rest of the pensions gap, and people will be expected to work longer. Given the lack of interest in pensions as a topic among younger employees, the question facing policy-makers is how to get people saving from an earlier age – so they can up capital that will provide a respectable monthly income until death.
Malcolm Goodwin points out that in the UK state pensions have been protected with the ‘triple lock’ (annual increase to be no lower than the lowest of three indicators – CPI inflation, average wage growth or 2.5%). “However, even so, the basic state pension is unlikely to provide, on average, more than 20% of a pensioner’s final salary. Given that by putting aside 8% of your monthly salary will provide you with a post-retirement income that’s only 40% of your final salary, while saving 12% a month will give you roughly 60% of final salary, bridging the pensions-saving gap requires an element of coercion if broad swathes of society are to avoid poverty in old age.”
The UK did this by introducing auto-enrolment, an obligatory scheme encompassing every employer with one or more employee on their payroll earning over £10,000 a year. The main change from the previous system was that employees now have the choice of opting out of their employer’s pension scheme, rather than opting in to a scheme that may or may not have existed.
Auto-enrolment was introduced in stages, starting with the largest firms in November 2012 and finishing with the very smallest employers on 1 February 2018. The process went smoothly, despite the scale of the undertaking. “At the peak, 10,000 small firms a month were signing up; Aviva alone was dealing with 200 businesses setting up pension schemes every week. These would all have been businesses whose employees never had a pension scheme from their firm,” says Mr Goodwin.
The process was helped to a great extent by information technology – a good API (interface) between payroll software and firms’ employee databases allowed employers to upload data quickly and painlessly into the pensions system. “The firms that had the most difficulty complying with the demands of auto-enrolment were ones with paper-based records”, says Mr Goodwin.
“There had to be an element of threat – fines for employers who refused to join. But the scale of this across the entire economy was minimal, with a total of £41m of fines levied against offenders. The typical fine was around £10,000, rising with the size of the business.”
After a year and half of full operation, auto-enrolment is working reasonably well. “Only 13% of employees have opted out of the UK scheme, as is their right, leaving 87% covered,” says Mr Goodwin. However, a report from Polish employer’s body Pracodawcy.pl suggests that 50% of Polish employees say they’ll opt out of the PPK system when it’s introduced in Poland. “I wouldn’t worry about that too much, says Mr Goodwin. “We had similar survey results in the UK prior to the implementation of auto-enrolment; in practice, human inertia takes over and people can’t be bothered to opt out once they’re in.” He points to the nudge theory of Nobel Prize-winning behavioural economist Richard Thaler, who researched the merits of opt-out vs opt-in as policy tools, showing clearly the social benefits of the former. Yet while inertia stops many employees from leaving, there’s also a distinct lack of engagement with their pensions, says Mr Goodwin. “Only 7% of Britons check online to see how their pension is performing.”
The biggest benefit that auto-enrolment has brought is the dramatic increase in under-30s who are now saving for their pensions. Before the scheme was introduced, only 35% of them had any kind of employee pension plan; today it’s 85%.
The cost of old-age care is likely to increase dramatically as more people live into their nineties; the number of dementia sufferers will rise along with it. “Being able to deal with vulnerable customers either online or over the phone will become a big challenge for us,” says Mr Goodwin. “We need to know that the customer still has the mental capacity to know what’s going on. Our vulnerable customer policy helps Aviva staff recognise the symptoms – and technology is helping here too,” he says.
The Polish employee capital plans (pracownicze plany kapitałowe, or PPKs), are modelled to a great extent on the UK’s auto-enrolment scheme, hence the interest in the UK’s experience in rolling it out.
The most important similarities between British and Polish PPK:
The employer sets up the programme on the basis of a contract with a selected financial institution, to which all employees are automatically reported via payroll software
The scheme is mandatory for all employers with at least one employee; the obligation will be gradually extended over time from the largest to the smallest companies (by 1 January 2021)
Contributions to the scheme come from both employee and employer
The management fee limit is set at a low level (0.75% of assets in the UK, 0.6% in Poland)
The employee may opt out of the scheme by declaring the intention to do so
On the Polish PPK market, Aviva has the advantage its UK experience in auto-enrolment, including how to easily set new pension schemes up, and its size and scale, which gives it the ability to “take the problem off the employer’s desk,” says Mr Goodwin.