Pension schemes• Basic State Pension• Contract-base Pension• National Employment Savings (NEST)• Automatic enrolmentAutomatic enrolment is whereby an employer automatically enrolseligible employees into its pension scheme.From 2012, a new duty placed on employers to enrol all eligiblejobholders. They have to meet certain quality criteria and make aminimum contribution to that arrangement. Once enrolled,individuals can opt
Default options is an example of Automaticenrolment, in which firms automaticallyenrol employees onto a ‘default’ PensionschemeA default option is the investment option, selected by thepension scheme trustees, employer or provider, which isused when an individual pension member does notindicate an investment choice.It is also not unusual for some pension members toactively choose to invest in the default option.There are a number of steps that typically occur in thedesign, determination and selection of a WPP defaultoption involving different stakeholders.
Measures taken to increase enrolment in defaultpensionsThe Pensions Act 2008 sets out to encourage greaterprivate pension participation.From 2012, changes to the system will be introducedunder which employers will have a duty toautomatically enrol all eligible workers and to makecontributions on behalf of those that do not opt out.Under the terms of automatic enrolment, everydefined contribution (DC) pension scheme that anindividual could be automatically enrolled into musthave a default investment option.
Benefits to:Firms• Capital/ funds received from employees can be used to invest and potentially make high returns or further growth in company• It can help small businesses attract and retain qualified people• More beneficial to larger businesses than small onesEmployees• Employer contributions to retirement plans are tax deductible expenses• Enables retirement, possibly at an earlier age• Sustainable income at a later age• Better lifestyle• Increased savings through pension• Safety option if in an accident or sacked at an early age
Costs to:Firms• Uncertainy over company revenues• Low worker demand• High administrative costs• Complex government regulations• More costly to smaller firmsEmployees• Lower levels of disposable income• Possibility of risk as pensions can be lost if employer collapsesand loses all its capital and liquid assets• If pension is removed before the employee is 59 and a half years old in themajority of pensions they are subject to an IRS penalty in addition to ordinaryincome tax.
Why do people enter into it?In reality the majority of will not select a specific investment option that matchestheir individual needs but will instead enter the default option.Psychological factors have been presented as an explanation.Such as:• The Existence of myopia(tendency for individuals to be short-sighted in their planning),• Procrastination and inertia(tendency to put off, or stop thinking about the future•General apathy•A lack of confidence among individuals when it comes to making financialdecisions.From the Economics literature ‘The Pensions Commission’’The Government estimates that around seven million people are not saving enoughto meet their retirement aspirations.‘Based on DWP modelling using data from the English Longitudinal Study of Ageing’
Default options objectives:The structure of a default options is highly sophisticated as it has to meet several objectives:Suitability – likely to be suitable for the majority of the members, in terms of its investmentstrategy and asset allocationAffordability - Total charges should be below the stakeholder price cap.De-risking mechanism - By de-risking , a strategy which mitigates members’ investmentvolatility appropriately over the lifetime of the productAsset allocation - The default option should invest in a diversified portfolio of assetsGovernance - holding regular reviews and communicating effectively with scheme membersThese objectives together try to maximise the employees investment and create a efficient andsuccessful system that can suit the majority of people.
ConclusionThe new changes in 2012 may create a more efficient example as all employees are enrolledand the effects will be clearer.Most empirical evidence shows that with most employers, approximately over 80 per cent ofemployees are likely to end up in the default option.This means that decisions about the design of default options will impact upon a very highproportion of UK employees after automatic enrolment is introduced.Evidence suggests that firms who have over a 100 employees were more likely to use thedefault options compared to smaller firms as the average employee is more suited towardsthe default option.Overall the default option has been successful for large firms but not smaller ones. Thereasons is because they are able to get their employees to participate mainly due to a lack ofinformation and psychological reasoning . Whereas smaller firms (employees < 100) only havearound of 29% of employees on pension schemes as its riskier and more costly for them. Sothe employees who do enrol, enrol to the most specific pension for themselves.
• Has it been successful in raising the number of participants• Effect on global economy• Stats figues ?• Graphs?