UK Pension Paper Said to Favor Auto Enrollment

May 22, 2006 ( - The paper that will set out the future for pension policy in the UK is due out by the end of the week, but is believed to call for, among other things, auto enrollment and a minimum of 3% contributions by employers into the pension plans of employees.

The paper – which has taken about eight drafts and several back-and-forth wrangles between Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown – is meant to be an answer to recommendations of a government panel led by Adair Turner that was published in November.

According to a leak to the UK’s The Guardian, the white paper will require employers to contribute a minimum of 3% to employee pensions, if the employee does opt out. The employee would contribute 4% and the state, 1%, as tax relief.

The UK paper estimates that the contribution by employers would come to about £2.6 billion.

The Turner Commission called for the establishment of a National Pension Savings plan that would require similar contributions, with employers to contributing at least 3%, but proposed a 5% contribution from employees (See Turner Commission Calls for UK Pension Changes). The Commission also said that in order to close the UK’s 57 billion-pound ($99 billion) retirement savings shortfall, the percentage of national income spent on pensions needs to rise to about 7.7% from 6.2% between 2020 and 2050.

The idea of auto enrollment (See UK Pension Commission Favors Auto Enrollment ) has drawn criticism from companies that claim it will drive their costs up and make them less competitive (See UK Pension Commission Proposal Suffers Another Attack).

According to The Guardian, employers have been resisting the proposal for compulsory contribution, but the white paper suggests 988,000 employers are either offering no help to staff pensions, or contributions of less than 3%. According to the leak, the paper says that forcing employers to pay in is necessary because without it “participation rates would be significantly lower,” and that the costs for employers could be handed off to consumers in the form of higher prices or lower wage increases in the future.

The paper supposedly says that by requiring automatic enrollment for all employees over 22 into a personal account when starting work – a point when annual earnings reach an estimated £5,000 threshold – 10 million employees will be eligible for enrollment, including many part-time workers.

But according the newspaper, the paper warns that if employers do not cooperate with the automatic enrollment scheme, it could be replaced with a minimum-wage type scheme.

The white paper proposes two alternatives for administering the national pension savings scheme. Namely: one in which all personal accounts would be provided by a single organization, or one in which a small number of pension providers would offer personal accounts, giving individuals more of a choice, the newspaper reported.

The leak to The Guardian came a day after Work and Pensions Secretary John Hutton announced on Sunday that an increase of the retirement age from 65 to at least 67 would be gradual.