By Alessandra Malito, MarketWatch
Saving for retirement in the United Kingdom has become a given.
The U.K. was the first nation to require all companies in the private sector to enroll their employees in a defined contribution retirement plan. The process has been gradual since 2012, but has already shown significant improvement in the amount of money citizens have saved for their futures — compared with when workers were left to sign up for an account on their own.
About nine in 10 workers at medium and large companies are now contributing to a retirement plan, and 70% at small employers, according to an analysis by the Boston College Center for Retirement Research. Comparatively, 51% of Americans in the private workforce were participating in a workplace retirement plan, according to the Pension Rights Center .
The auto-enrollment mandate, referred to as the NEST program (short for the National Employment Savings Trust), is layered on top of the country’s public old age pension, similar to the U.S.’s Social Security. The government-backed pension is basic, said Ramsey Alwin, director of thought leadership in financial resilience, policy, research and international affairs at AARP, but the British also don’t have to worry as much as Americans about expensive medical costs in old age, since the country has state-funded health care.
Retirees receive $169 a week under the State Pension, but the amount can be higher if they delay their benefit payments (similar to the U.S. system ). Eligibility age varies for men and women depending on their date of birth (for example, a man is eligible this year if he is 68 years old, and a woman if she’s 66, both born after April 6). They must also have worked for at least 10 qualifying years.
The NEST program doubles down on retirement security though, as a means to ensuring residents are comfortable in retirement.
Here’s how it works: U.K. employees are eligible for the government-sponsored workplace retirement plan, which invests those assets, if they’re at least 22 years old but no older than 65 or 63 (the state pension ages for men and women, respectively), earn at least $13,000 (converted from euros) and were with their company for at least three months. Beginning in April 2019, employees must contribute at least 5% of earnings and employers must contribute at least 3%, for a total minimum contribution of at least 8%, according to the Pensions Regulator in the U.K. Those minimum requirements have slowly increased each year. Companies were phased into this mandate, beginning with the largest employers.
The system is working, so far. Employees at medium and large companies saw participation rates jump 37% after auto-enrollment was implemented, and smaller employers saw a 44% increase. Lower earners, employees under 40 and people who had been with their companies less than four years benefited the most from auto-enrollment, Boston College found.
Encouraging employees to put money away for retirement is always a good thing, and yet there’s a caveat. Employers are enrolling workers with a low contribution rate, which may ease them into getting started, but doesn’t add up to enough if they continue to save the minimum rate throughout their careers. Bottom line: If workers don’t consistently ramp up contributions, they won’t end up saving very much for retirement.
Sometimes employees consider the contribution rate they were enrolled with to be a suggestion from their employer, or they may never get around to changing it on their own, even years after they were automatically enrolled. If they do increase the rate, they may still not put as much away as they should (in the U.S., for example, companies that auto-enroll workers in a 401(k) plan start with 3% to 6% of an employee’s salary, but financial advisers typically suggest Americans save as much as 15% or more for retirement).
Still, the U.K.’s system shows promise, especially as so many citizens across the globe lack retirement savings. “That pooled federal platform is critical,” Alwin said, especially as workers move from job to job, and life expectancy increases. “It is a very important step in the right direction.”