Retirement planning around the world

But reports increasingly show more workers in the UK are now signing up for a workplace pensions scheme, especially since auto-enrolment started in October 2012. UK employers are now mandated by the government to automatically enrol all staff who meet the criteria into a workplace pension. The process started with the biggest businesses, with employees over 120,000, since they would have been more systemically prepared. Smaller businesses are being gradually signed up over a six-year period.

The next key milestone in the retirement space is the new rules on pensions freedom, announced last year by George Osborne, under which, from 6 April, employees can take their entire pension pot when they retire rather than drawing it down or buying an annuity. This is expected to change retirement funding. But some advisers suspect that with the upcoming elections looming, this is politically driven. Whatever the motivation, other countries such as Australia, New Zealand and the US are regularly cited as being far ahead of the UK in offering pension schemes.

Daren O’Brien, director of London-based Aurora Financial Services says, “In the UK, there seems to be a mixed message from the government with auto-enrolment and pensions freedom. The government is supposed to make things simpler but it becomes more and more difficult. With the elections in the background this seems political.”

Offering options

However, Rick Eling, head of investment solutions at Sanlam says retirees will have more options after 6 April. “I think over the years we have been led to believe that an annuity is the only option and of course that’s not the case. There have always been drawdown options available but they have been seen as wealthy people’s options,” he says.

So where does the UK fit in the list of top pension providers around the world? According to the Melbourne Mercer Global Pensions Index 2014, the UK is at number nine with the top three spots bagged by Denmark, Australia and Netherlands.

Denmark has a well-established compulsory occupational pension scheme called ATP, founded in 1964, which employees aged between 16 and 67 pay into, while their employer pays two-thirds of the ATP contribution. The pension is paid out either as a lump sum if the balance is below a set amount or in the form of an annuity. ATP is behind Now: Pensions, set up to provide auto-enrolment to the UK.

Australia’s Superannuation Fund meanwhile, is almost 20 years old. Under this scheme, all staff aged between 18 and 70 who earn more than A$5,400 (£2,753) a year, receive a minimum contribution of 9.5 per cent of their annual salary from their employer. This is expected to rise to 12 per cent by 2019. “One key challenge that the increased coverage of defined contribution pensions could present is the potential increase in the number of people with multiple, small pension pots” says Patrick Nolan, former chief economist of the think-tank Reform.

Mr. Nolan refers to the Australian government’s review of the Australian superannuation system. This Review’s final report (published in June 2010) noted that: “While there are some individuals who have sound reasons to hold more than one super account ... each duplicate account incurs administration costs. In many cases, this is simply a deadweight cost to the individual and the system overall.” The review went on to note that consolidation of accounts could be a “time-consuming and frustrating process,” with one provider reporting that “only 6 per cent of members who started a consolidation process actually completed it.” As part of the 2011 Stronger Super reforms, the Australian government thus proposed introducing measures to help auto-consolidation of super funds.

In the UK, pensions minister Steve Webb is pushing for a pensions passport that will combat confusion around multiple pensions pots and which would ensure all the information about an employee’s pension is in one place to ensure easy access.

New ways of thinking

Apart from these countries, New Zealand, which did not make it to the list, is still a success story according to some. The Kiwisaver scheme was started in 2007 to introduce a culture of saving in the country. Under the scheme, any new employees aged between 18 and 65 are automatically enrolled into their employer’s pension plan. Employees get four weeks to opt out.

Kiwisaver has made New Zealand a late entrant to the list of countries with a successful retirement savings plan but has still been instrumental in making the working population of New Zealand committed to retirement savings. So, are there lessons that the UK can learn?

“Absolutely,” says Tony Stenning, head of UK retail at BlackRock. “As compared to other markets, further levels of flexibility can be introduced in the UK markets. With greater flexibility comes greater responsibility but it is good because it will allow people to save more and take control of their funds.

“Come April, there will be more flexibility in the UK which will be in line with other markets such as Australia, New Zealand and the US, “ he adds.

But Reform’s ex-economist, Mr Nolan says there is a difference in policy environments between New Zealand and the UK. “These differences include the relatively low level of pre-existing savings in New Zealand, which meant that Kiwisaver filled a clear gap, he says, adding, “in the UK a high proportion of people already hold a private pension.”

He goes on to say that there is a greater risk of members and employers levelling down and reducing their savings to the level required for auto-enrolment. “There is also a greater risk that auto-enrolment will cannibalise the business of current providers,” he says.

Another success story has been the 401(k) in the United States, which is a retirement savings plan sponsored by an employer. Under this scheme, a worker can save and invest a portion of their salary before taxes are taken out. There are no taxes paid until the money is withdrawn from the account, giving individuals more flexibility on how that money is invested.

However, the plan comes with certain caveats, for example not being able to tap into the employer’s contribution immediately. According to the plan, you need to spend a certain amount of time working for the company before gaining access to its payments to your 401(k).

Leaving the UK behind

Even with the new freedoms, the UK is far behind the 401(k) in giving flexibility to its workers, especially with the auto-enrolments still in the process of completion. According to a report by the CIPD, a professional body for HR and people development, there has been an increase in the proportion of workers saving into a workplace scheme, up from 61 per cent to 64 per cent between December 2013 and December 2014. In December 2010, the figure stood at 45 per cent.

“The UK needs to embrace additional flexibility,” says BlackRock’s Mr Stenning. “It needs to give people the ability to access pots without giving them full access to their money. In other words, give them the illusion of money access.”

Keeping all comparisons in the background, it is also extremely important for the government to educate the working population on the benefits of retirement planning.

Countries like Denmark, Australia and the United States have had pension schemes in practice for decades and have, over a period of time, educated their population on the benefits of planning for a better future in retirement.

But there are still lessons to be learnt, especially from newer entrants like New Zealand, as auto-enrolment in the UK moves forward and pensions freedom becomes a reality.