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Caught on the opt

I read something the other day about the auto-enrolment of 10 million employees into pension saving in 2012. You probably already know the plot of this future horror story by heart. Ten million employees who currently do not receive a pension contribution from their employer will be swept into voluntary pension saving by legislation. The pension saving will be voluntary in the sense that if they do not want to save in a pension, they will be allowed to opt out of auto-enrolment.

I suppose it is a sort of voluntary compulsion which will ensure that the only people compelled to save will be those who want to be compelled.

Voluntary compulsion is an interesting concept that may one day prove to have uses in other areas of finance than pensions although I would guess that if it were to be applied to paying our taxes, it would probably be something of a disaster.

But I digress. The thing that got me thinking about this whole idea of voluntary compulsion was reading that the process might result in something like another four to seven million people saving for a pension. I have done the maths and have worked out that if auto-enrolling 10 million people into pension saving results in seven million actually sticking with it, then three million people will not. If only four million people stay enrolled, then as many as six million will be opt-outs. Either way you look at it, millions of people can be expected to be swept into pension schemes, only to opt out as soon as possible.

The Government people who have designed voluntary compulsion have always anticipated that not all those subjected to auto-enrolment will benefit from saving in a pension scheme. That is because of the potentially drastic loss of value that could apply to their pension savings if they are among the millions of employees who are destined to end up on means-tested support when they become old.

It will not be clear how many people could be affected by this until the results of the Government’s research into the problem are published later this autumn but it is likely to be one of the key reasons that millions of people will opt out in 2012.

Having opted out, perhaps for the good reason that saving will represent such poor value for them, the refuseniks will find that they are denied the 3 per cent contribution from their employers that those who remain in the pension scheme will become entitled to under the new laws.

Even if employers are sympathetic to their plight, there seems little chance that they will be able to offer the 3 per cent as extra pay without it being seen as an inducement to opt out, something that will not be allowed by the new laws.

Worse still, the 3 per cent paid into pensions by employers will not come out of the ether, it will come from their business like other forms of pay. Those who opt out will therefore earn less than those who stay in the pension scheme.

This is a classic Catch-22 situation. Pension saving is not intrinsically suitable for all employees. Nevertheless, all employees will be auto-enrolled into pension saving. Some will get the full benefit of the money they save but some will not. Of those who will not, the ones who fail to work out that they will get poor value from pension saving and stay in the scheme will save for years and eventually get poor value from their pension savings. Those who do work out that saving will represent such poor value will be able to opt out of saving but will get paid less than their work colleagues as a result.

At this point, I began to wonder what is really going on here. I think it goes something like this. In 2012, millions of employees will be given the choice of either poor-value pensions or lower pay. A tough call for anyone, I would have thought.

Steve Bee is head of pensions strategy of Scottish Life

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