End of the road for ‘auto-enrolment’ business model?

For the last few years, the coalition government, under the watchful eye of Lib Dem pensions minister Steve Webb, has been slowly and unspectacularly taking forward Labour’s plan – developed with the support of all parties, and both the trade union movement and the Confederation of British Industry – for automatic enrolment into a workplace pension. Following George Osborne’s announcement yesterday, that plan has been partially torn up.

Auto-enrolment was an attempt to solve, in a quite radical way, the apparent problem of ‘under-saving’ in the UK, which would have led to an impoverished retirement for many people. Of course, the real problem was not the prospect of pensioner poverty, but rather the prospect that the state might be called upon to alleviate poverty in later life on a massive scale as employers withdrew from voluntary provision of occupational pensions.

Auto-enrolment is therefore based on an historic compromise between workers and bosses: employers remain responsible, to some extent, for our long-term financial well-being, but are no longer required to shoulder the risks inherent in collectivised ‘defined benefit’ (DB) pension schemes. In their place come ‘defined contribution’ (DC) schemes – a legacy of Margaret Thatcher’s financial sector deregulation – in which employers continue to contribute to our pension pots, but the investment risks are entirely individualised.

Understanding these relatively technical changes is vital to understanding the profound significance of the announcement made by George Osborne today. Because the other key difference between DB and DC pots is that whereas, in the former, pension outcomes are known in advance, in the latter, outcomes depend on the deal savers are able to strike with insurance companies when they reach to retirement, and turn their individual pot into a pension income by buying an annuity.

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Image: Colin