An opinion poll commissioned by the National Association of Pension Funds (NAPF) has indicated that 33% of the public in the UK plan to opt-out of a pension plan if they are automatically enrolled into it over the next few years.
This level of opting out, if put into practice, would mark a significant blow to the UK Government's hopes of tackling the UK's inadequate retirement savings by forcing companies to auto-enrol staff into pension funds.
The willingness to opt out of a pension stems from a deep distrust of the pensions industry, the NAPF survey found.
Some 54% of people polled by the NAPF said they were not confident in pensions as saving products, up from 48% when the same survey was asked in 2011.
A series of poor headlines over the last year created by deficits at company pension funds may have contributed to deteriorating trust in pensions along with turbulent financial markets.
Arguably this erosion of trust comes at the worst possible time though.
The government and many major defined contribution (DC) providers are hoping that as many as 11 million people will become pension savers over the next few years as they are automatically enrolled into funds by their employers.
The economic squeeze affecting the country also seems not to be endearing workers to the prospect of being signed up to make pension contributions unless they explicitly opt out.
35% of respondents to the NAPF survey said they would opt out as they are unable to afford the contributions that the Government's plans entail. Another 23% blamed that fact that they do not trust the Government on their pensions policy.
NAPF chief executive Joanne Segars said that the disappointing findings for the pensions industry show that "the benefits of auto-enrolment need to be more widely understood."
Segars said that "the weak economy and rollercoaster stock market may have put many off pensions, but there are also growing doubts about whether a pension is good value, and these need addressing."
She added that "people have to be sure that it pays to save. Pension charges can be fiendishly complicated and they must be made clearer."
Interestingly the NAPF survey findings mirror those from a study by asset managers Legal & General in September 2011, which also found that 33% of people likely to be automatically enrolled into a pension would chose to opt out.
Views from the industry
Given the faith the pensions industry is placing in auto-enrolment to revive occupational pension saving there has been a flurry of reactions to the Pension Funds Insider news desk about the NAPF's findings on possible opt out levels.
Malcolm Small, director of policy at the Tax Incentivised Saving Association told Pension Funds Insider that he found the survey results as "no surprise." Small said that "we in the industry really don't always appreciate the antipathy amongst consumers towards pensions".
Small cited years of negative headlines from isolated pension scandals and public confusion at complex pensions terminology as creating distrust. He also said that "the automatic enrolment policy was designed against the relatively benign economic background of 2004; things are a lot different now".
Zoe Lynch, a partner at pensions law firm Sackers agreed that the economic background was a major deterrent, saying that "if you can't afford to heat your house or put food on the table then how can you afford to contribute to a pension?"
Lynch added that "if people are to opt out on this scale it could have a major impact on all of us as taxpayers as ultimately we carry the burden for people failing to make adequate pension provision for themselves".
Lynch also questioned whether high opt outs would disrupt the economies of scale that are allowing major providers of new DC pensions to offer competitive low fees.
Keith Webster, a partner at lawyers Osborne Clarke cautioned though that there is a difference between people wanting to opt out and being able to do so, largely because the government is deliberately seeking to make opting out a difficult and tedious bureaucratic process.
Webster told Pension Funds Insider that "many people who want to opt-out may not actually manage to do so in time. The Government is relying on this failure to opt-out to increase levels of pension saving."
Webster said that given the overall goal of boosting pension saving, "if opt-out levels are high it will inevitably increase pressure for pension scheme membership to be made compulsory".
Phil Duly, associate of pension consultancy Barnett Waddingham argued that Ministers needed to stick to their guns in promoting pensions saving.
Duly warned that that "any budgetary attack on the tax-free retirement cash sum option would be likely to increase the level of opt outs. Any further delay to auto-enrolment for small employers would also increase uncertainty and delay employers' preparations".
Duly struck an optimistic tone though by saying that even if one in three workers set to be auto-enrolled subsequently opts out, "this will still mean pension provision reaches a very much wider proportion of the population."
Background
The programme of auto-enrolment is to start in autumn 2012 for companies with over 120,000 staff and be phased in gradually until all small companies with less than 50 employees automatically enrol staff in 2018.
All permanent UK employees are due to be automatically enrolled into a pension and will eventually need to make a contribution of at least 4% of their salary (with employers providing a further 3%). Employees have a right to opt out but must actively seek to do this without an employers' help and are to be enrolled back into the pension three years later.
The idea is influenced by theories of behavioural economics which suggests people can be encouraged into making the 'right' choices by making them easier options.
First published 07.03.2012
dbillingham@wilmington.co.uk
