Social costs of auto-enrolment in workplace pensions and possible remedies

Abstract

This research examines the different social costs that have a bearing on the form and content of regulatory intervention underpinning the Auto-Enrolment (AE) pensions’ regime and whether these are recognised within current UK legislation. AE requires employers to assess the workforce and, subject to qualifying criteria, enrol them into a pension and make contributions to the pension. Workers are also required to contribute to the pension although they can choose to leave the scheme, Since its introduction in 2012, more than 4.7 million workers in the UK have now been enrolled into a pension which they did not choose highlighting the impact of the regulatory intervention.

The starting point for my research is to consider the history of pension legislation in the UK and the circumstances leading up to the introduction of AE. The next step is to consider whether this legislative intervention is paternalistic and, if so, whether justified. I then consider whether the implementing legislation functions as it was intended or whether there are any unintended consequences. Parliamentary debate at the inception of AE illustrates an intention to ensure that individuals save more for themselves for their own good. Behavioural economics was widely referred to as authority on the hypothesis that individuals do not make rational financial decisions for themselves, justifying legislative intervention to ensure that private pension saving is the default position for all workers in the UK.

Paternalistic legislation can be difficult to justify where individual choice is overridden entirely and so the legislation allows for individuals to opt out – soft paternalism or nudge. There is an assumption that low opt-out rates indicate that individuals now agree that the pension saving is in their best interests, justifying the intervention.

However, there has been a marked dearth of research into AE savers' actual perceptions of how the schemes work for them. My research has come to close this gap and also allows drawing up some normative conclusions regarding the proper framework for offering and regulating AE in the UK. In particular, participants were asked to discuss their own choices and actions within their workplace pension and understanding of pensions’ information.

Employers and professional advisers were also interviewed to build a complete picture of the practical implementation of AE. In considering these findings my work considers whether there are negative or unintended consequences of the policy change and how these are dealt with.