Lesson from Down Under for pensions reform

Escalating Penalty Notices issued – the fine for small employers with one to four staff who fail to comply with an EPN is £50 per day and for those with five to 49 it is £500 per day.

And there has been the occasional high profile miscreant, for example fines totalling more than £22,000 against Swindon Town Football Company Ltd.

So how does the UK experience compare with others who have gone before, specifically Australia and New Zealand.

The Australian Superannuation Guarantee Fund, known simply as the ‘Super’, is a full compulsion scheme introduced in 1992.

When first implemented, employers had to contribute a minimum of three per cent of annual salary to their employees’ pensions. Today, all employees aged between 18 and 70 who earn more than 5,400 Australian dollars (£3,545) a year receive a minimum employer contribution of nine per cent. This is set to rise to 12 per cent by 2019. There is no required employee contribution.

The Kiwisaver was launched in 2007. Employees aged between 18 and 65 are auto-enrolled into their employer’s pension scheme, but can opt out. Membership is not compulsory but, where employees contribute, employers currently make compulsory contributions of two per cent. A government-funded 1,000 New Zealand dollars (£530) tax-free payment is an incentive for staff to sign up.

In the UK employer contributions start at one per cent, rising to four per cent in 2019. Employee contributions start at 0.8 per cent, rising to four per cent. Government tax relief begins at 0.2 per cent, rising to one per cent. So, after April 2019, the total contribution is eight per cent.

After an initial opt-out period of up to a month those who subsequently want to quit can cease active membership in accordance with the scheme rules. How many might do so? It seems likely that an increased number of participants could fall away as contributions increase, but what level this ends up at is hard to predict.

Certainly, the New Zealand experience in particular provides useful lessons for the UK.

Complexity may require later simplification, workers in the UK could end up accruing rights to different pensions – the Government has set up the National Employment Savings Trust (NEST) as an option for employers but there are also stakeholder pensions of different kinds, the New Zealand experience shows that employees and employers tend to contribute at the legal minimum rate, while affordability and fear of changes in legislation once the system is fully rolled-out may affect employees’ participation.

And the UK needs to keep up the promotion push. David McNeice, senior consultant at Towers Watson, noted: “Australia is more than 20 years into its scheme, and there is still confusion, discussions and debates as to what the real purpose is. It has made what I consider an error in that it has never properly explained the scheme to the population.”

It is still early days on auto-enrolment but it could significantly change the UK pensions landscape, hopefully for the better. Trevor Law is managing director of Merito Financial Services, chartered financial planners,

based in Solihull. Email:tilaw@meritofs.com