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LONDON: Britain may soon have to force workers to start saving for retirement to cut a soaring pensions bill set to reach £120bn in 20 years.
The government wants people to pay into their own pension pots rather than rely on the state. But many employees, with limited disposable income, have been reluctant to do this. A scheme, introduced last October, automatically enrolls staff 22 years or older into a company or national pension plan, but gives them a choice to opt out.
So if large numbers of workers pull out because they don’t want to pay or can’t afford the contributions, the government may decide to make membership compulsory in a Pension Review due in 2017.
“If opt-out rates are 50 percent or more, it is possible the government will suggest removing opt-out altogether and make pension saving mandatory,” Paul Gilbody, head of defined contributions consultant relations at BlackRock Investment Management, said.
The government’s current pension legislation is an attempt to tackle the country’s ballooning pensions bill, set to hit 8.5 percent of economic output by 2060, from 6.9 percent now. Less than half of employees in Britain are putting money into a workplace pension scheme, the lowest proportion since records began in 1997, according to the Office of National Statistics.
Britain lags behind countries including Denmark, the Netherlands and Australia in global pension rankings. Its pension system ranks seventh out of 16 countries in a global comparison of national schemes, according to data from consulting firm Mercer. Its lowly ranking reflects an ageing population, low investment returns and large government debt.
The Department of Work & Pensions (DWP) said it had no plans to introduce mandatory private pension saving, but it did need to compel millions more people to save. The DWP said it expected 70 percent of people would stay in a workplace scheme and hoped to see 4.3 million savers in retirement schemes by May 2015 and between 6-9 million by 2018.
“One way or another, long-term pension contributions will increase,” Paul Macro, defined contribution retirement leader at Mercer said. “The government are trying to stop people relying on the state to support them in retirement.”
Under Britain’s current so-called auto-enrolment system, employee and employer both contribute 1 percent of pay into a pension. But this will gradually increase to 5 percent from the employee and 3 percent from the employer by October 2018.
Someone earning £26,200 ($41,400) a year, for example, would generate £4,667 of employer contributions over 10 years, based on the auto-enrolment pension contribution guidelines, according to estimates by fund manager Fidelity Worldwide Investment. Companies with more than 120,000 employees were required to start auto-enrolment in the second half of last year. For small firms employing between 50-89 staff the deadline is July 2014.
Eleven big companies, including supermarket chains J Sainsbury and WM Morrison have introduced the scheme. But other large firms have not done so yet.
A spokesman for Morrisons said that one-fifth of their qualifying workers, many within 20 years of retirement, had opted-out of the workplace pension scheme. A manager at fashion retailer Next said: “I figured I’m 27 and should start some kind of pension so I haven’t opted out,” she said. But she also said would pull out if the contributions had a big impact on her monthly disposable income. Reuters