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October 15, 2020 11:39 AM

U.K. needs to raise employer contributions, panelists say

Paulina Pielichata
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    Tourists pose for photographers near the in view of the Houses of Parliament in London across the Thames River
    Bloomberg

    View of the Houses of Parliament in London across the Thames River

    Employer contributions to defined contribution plans should gradually be increased by the U.K. government, panelists at the Pensions and Lifetime Savings Association's annual conference said Thursday.

    There is a risk that the government's coronavirus pandemic relief programs have propped up not just healthy businesses but also "zombie firms," Adrian Boulding, director of policy at the £2 billion ($2.6 billion) defined contribution multiemployer plan NOW: Pensions, London, said on a panel discussion. Due to the bankruptcies that could follow the COVID-19 crisis, "we will see a lot more (inactive pots known as) deferred pots and small pots," he said.

    DC participants are more likely to come out of the pandemic with retirement savings gaps because they may have lost their jobs. These gaps will need to be replenished at later stages in their careers in order to achieve an adequate retirement outcome, speakers said.

    "Contributions have to be higher due to adequacy reasons," said Chris Curry, director at the Pensions Policy Institute. Regulations in the U.K. mandate that employers and employees contribute a combined 8% to DC plans. The combined contribution rate was already increased twice in 2018 and 2019 to 5% and 8%, respectively. Speakers did not suggest what a higher contribution rate might be.

    Speakers also said that higher contribution rates from employers could prevent employees from leaving their plans or opting out. "But employees are less likely to opt out if they have to give up a high employer contribution," Mr. Curry said.

    However, before a new contribution rate policy can be implemented, the government needs to study employer affordability, said Rob O'Carroll, head of automatic enrollment policy at the U.K. Department for Work and Pensions, speaking on the same panel. "We have to look at the impact on employers," of mandating higher contributions, he said.

    A 2017 review of U.K. automatic enrollment rules showed there is consensus that the contribution rate should be higher, Mr. O'Carroll said. However, the review did not result in recommendations regarding what the new rate should be nor whether a higher rate should apply to every employer and employee.

    Almost half (49%) of delegates attending the virtual session said the contribution rate is the most pressing issue faced by the industry, with the share growing to 63% when questioned again at the end of the panel discussion.

    Automatic enrollment into decumulation options is also needed, Mr. Boulding said. "People need to be able to select a sensible decumulation policy," he said. Plan participants predominantly choose to invest their retirement savings in cash strategies in decumulation, Mr. Boulding said, adding that 35% of participants select drawdown and 10% select annuities. But Mr. Boulding thinks plan participants need "a little bit of both" by "blending annuities with income drawdown."

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