The United States faces a retirement savings crisis. Just over half of all workers don’t have access to a retirement savings plan through their employer. Most working families, even near-retirement age households, have very little saved for retirement. The United Kingdom faces a similar challenge, but has decided to take bold steps to address it. The U.K. is in the process of implementing mandatory enrollment of all workers in a retirement savings plan with required employee contributions.
A recent report from the National Institute on Retirement Security examines the successes and challenges so far of the U.K.’s new retirement savings initiative. The U.K. has a government retirement program called the State Pension program that is similar to Social Security in the U.S. The new retirement savings initiative is separate from that. Beginning in 2001, the U.K. required all employers with five or more employees to offer a retirement savings plan. However, employees were not required to participate and few did. Seeking a stronger solution to their retirement savings crisis, the U.K. now requires all employers to automatically enroll their employees into a retirement savings plan. This program is being phased in over six years, starting with large employers in 2012 and concluding in February 2018 when all employers will be required to participate.
The new retirement savings initiative also includes required contributions to the retirement accounts. The amount of the required contribution is being phased in over time. The individual employee, the employer, and the government are all required to contribute and the amount that each contributes is being increased during the phase-in.
The overwhelming number of retirement accounts are defined contribution plans. A 2015 report found that only six percent of employees were being enrolled in defined benefit plans and only five percent were being enrolled in hybrid plans. Eighty-eight percent are being enrolled in defined contribution plans. These plans could be retirement plans already used by the employer, other private-sector retirement plans, or a new government-established retirement fund- the National Employment Savings Trust (NEST). Whichever plan the employer chooses, there are certain minimum requirements for that plan established by the government.
The U.K.’s new retirement savings initiative seeks to address many of the obstacles to retirement preparedness. Auto-enrollment and required contributions are the two biggest steps taken to overcome these obstacles. Having access to a plan matters, but as the U.K. learned with its 2001 requirement to offer a plan, many workers don’t enroll in a plan even if they have access. Similarly, setting a minimum contribution requirement also makes a difference. When it’s fully phased in, British workers will be receiving an eight percent contribution to their retirement account.
The new British retirement initiative also includes very stringent requirements to prevent pre-retirement withdrawals of savings. This is to prevent “leakage”, which is a common problem with 401(k) accounts in the U.S. Additionally, NEST is supposed to be a low-fee investment option, although there is some question as to whether it is truly a low-fee option. NEST also offers a wide array of investment options, with the default option being a target-date fund.
As with any big, new initiative, there are challenges to this program. Currently, NEST does not include any way for workers to annuitize or gradually withdraw their savings in retirement. Unlike a defined benefit pension, which provides a fixed, monthly payment for life, the only option currently available with NEST is a lump-sum payment. This may change over time as workers build up larger accounts and need options to gradually draw down on their account. Also, while NEST and the retirement savings initiative in general provides a fair degree of flexibility to individual workers, few take advantage of that. For example, very few employees contribute more than the required contribution amount or make additional voluntary contributions to their accounts. Furthermore, most employees stick with the default investment option: fewer than one percent actively choose to invest in something other than the default option.
Despite the challenges and limitations faced by this new retirement savings program, the U.K. should be applauded for pursuing a solution to the retirement savings crisis. As states across the U.S. seek ways to improve the retirement security of their citizens, there is much they can learn from what is being done in the U.K.
