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Add choice to opt-outs

Why should people lose everything on opting out?

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It is now 2011 and pension reforms are no longer coming in from 2012, they are coming in from next year. A sobering thought.

Between the London Olympics and the Rio Olympics the reforms will completely change the pension landscape in the UK in the most fundamental way since the Beveridge reforms of the 1940s. When we started Paradigm Pensions and our JargonFreePensions website just a year ago, I said the reforms would probably be the most important four or five-year period in our pension history for over half a century.

The Government has confirmed the reforms will be going ahead, it is fair to say I have upgraded that “probably” to “definitely”.

The idea is that in future all employers will be required to make a private sector workplace pension scheme that meets minimum standards available to all of their eligible employees. The vast bulk of employees will be eligible. A process known as auto-enrolment will put the onus on employers to enrol employees into such qualifying workplace pension schemes as soon as they become eligible. The default will be all employees on starting work or changing jobs will find themselves plonked into a pension scheme – exactly what happened to me and my generation in our youth.

On the face of it, that sounds great. Employers will sweep their employees into pension saving and, like me, many of them may not even realise what is going on until one day when they are older and are grateful to have had the chance to build up a pension at work with the help of their employers.

However, I think there is a serious flaw which could undermine the whole idea. It is not going to be possible for employers to omit eligible employees but, once enrolled, such employees are not required to remain in the pension schemes, they retain the right to opt out.

If we stick with the idea of opting out, why can’t we consider the idea that the only thing employees should be able to opt out of is making their own contributions? We assume that because people may not want to, or be able to afford to, pay into a pension scheme, they also think it is sensible to forego their employer’s contribution too.

As things stand, if employees opt out, they give up the right to their employer’s pension contribution. Moreover, the legislation forbids employers from giving the foregone contribution to employees who opt out in any other form. Employers must not induce employees to opt out of their schemes. As far as the employee is concerned, the money is lost if they opt out. They either have it paid as a pension contribution or they do not get it.

I know it is the way things always have been but it does not mean they have to stay that way.

Steve Bee is managing pensions partner at Paradigm Pensions

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