The U.K. Pensions Commission today outlined a proposal to create a national defined contribution plan known as the National Pension Savings Scheme. The proposal, one of several designed to reform the country's retirement system, would automatically enroll employees but allow them to opt out of the plan. The minimum employee contribution would be 5% of annual pay above £5,000 ($8,600) and below £33,000. Another 3% would come from employers.
Under the savings scheme, employees could decide to invest in a model that is similar to that of the U.S. Federal Retirement Investment Board's Thrift Savings Plan, which offers a choice of six core managers at a fee of about six basis points, Commission Chairman Adair Turner said in a press conference. "Typical" charges for individual investors in the United Kingdom currently can run about 130 basis points, he said. External managers would be hired to run the assets.
The proposal would increase competition among money managers looking to run the assets for the government. "There will be a huge amount of pressure on lowering fees," Tim Keogh, worldwide partner at Mercer Human Resource Consulting, said in an interview. "Although the money to go around will be the same if not slightly higher, the bulk of it will be controlled by a government that's determined to get low cost, so there will be huge competition to manage those assets at lower fees and margins."
Another option would be based on the Swedish Premiepensionsmyndigheten system, which offers more than 600 funds "but doesn't bring (fees) down," he said. It would allow individuals to invest in socially responsible funds, hedge funds, private equity and other asset classes.
Separately, the commission also recommended that the current state retirement age of 60 for women be increased to 65, the same age as men, between 2010 and 2020. The overall retirement age should then be raised to 67, 68 or 69 by 2050, Mr. Turner said. In addition, state pension expenditures as a portion of the GDP should be 7.5% to 8% by 2045 compared with the current 6.2%.
The report, which took three years to write, will be considered by the government's Department for Work and Pensions. A response is expected in spring 2006, said Ben Lloyd, department spokesman.