Auto Enrolment and UK Pensions

The UK has a wide range of pension provision, however a lot of citizens until now have been dependant on the state pension. Unlike many countries around the world the UK state pension is not high and it is tough to live on that alone.

The UK has embarked on a bold program, which follows somewhat the model of Australian. It is compulsory for UK employers to select a pension provider and to contribute a % of income for the staff / employees to it. Initially the contribution rate was modest being 1% for employers and 1% for employees, this has now rise to be 2% for employers and 3% for employees. From the 1st April 2019 that will rise further to be 3% Employers and 5% employees. That is a dramatic change for both employers and employees alike.

The logic is based around what earnings are needed to live in retirement, someone joining the workforce at the age of 18 needs to contribute around 9% of their earnings to be able to get a pension, when combined with the state one to be 50% of the average earnings. Someone who joins the workforce at the age of 22 needs to contribute 11% of their earnings, so as can be seen the starting age is all important as the compounding up of investments makes a huge difference.

The scheme whilst very good has put a lot of pressure on employers and employee budgets a like. There is also a relevent earnings threshold so earnings are only subject to the auto enrolment contributions about a based level and up to a max earnings level. This means however that even at the new combined rate of 9% from 1st April 2019 the effective contribution rate will only be around 6% so still a long way short of what an 18 year old would need to contribute and what the typical worker does.

The Government is consulting about the future of contributions and the TUC the UK trade union body is calling for 10% employer contributions. This would not be affordable in the short term. But given the above an increase in employers contributions over time up to 5% so total contributions came to 10% appears logicial.

The UK Government has announced that from the mid 2020 the lower earnings floor and the lower earnings age limit will be abolished so some progress towards the necessary higher contributions are already planned.

I personally hope that the higher limit will be abolished in due course and after some years of stability where companies in the UK can adapt their pricing and customers to the new cost base then at that point the employers rate can be reviwed and increased.

Of course the other side to this is a big increase in funds available to pension funds to invest, and it is great to see an increase in private equity funding in the UK which is also very welcome.

Conclusion

The auto enrolement policy is a very positive step and well improve incomes for the whole nation in retirement the main beneficiaries being the youngest in society who will the most out of the higher contributions now in progress or being planned and from the culture of compulsory stock market investing.