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Auto-enrolment: the Pension Commission’s ‘big idea’

27 October 2020

The last post discussed how the Pension Commission was established by the Labour government in 2002 to review the level of occupational pension provision, as well as the level of personal pensions and other savings.

Postponing retirement
The Commission published its second report in November 2005 which, according to analysis by the Institute for Government, made recommendations for reform far beyond its original remit.

As outlined in the last post, despite the Treasury’s reservations, the report made the case for a simpler, less means-tested state pensions so it could provide the base on which to build a private pension. It made the even more radical proposal to increase the state pension age from 65 to 67-69 by 2050.

This recommendation was driven by concerns over increasing life expectancy and a low predicted birth rate. The Commission predicted the proportion of the population aged over 65 would double by 2050.

Increasing state pension age was a political hot potato. Discussing increases in the state pension age were challenging. But the findings of the Commission made it impossible to avoid.

Aware of the heightened emotional response to increases in the state pension, the Commission worked hard to persuade people why this was a valid suggestion. The Department for Work and Pensions held events around the country testing citizens’ responses to the findings of its first report.

The ‘big idea’
The Commission’s ‘big idea’ was to use lessons from behavioural economics to harness people’s inertia. The recommendation from the report was to introduce “a new policy for earnings-related provision which recognises the inherent inadequacy of a purely voluntary approach, but which stops short of full compulsion.”

This would rely instead on the “automatic enrolment of employees into either a new National Pensions Savings System or into existing company pension schemes, but with the right to opt-out, and with a modest level of compulsion on employers to make matching contributions.”

This proposal for the automatic enrolment of employees into a pension scheme aimed to address each of Turner’s ‘killer facts’ outlined in the last post.

Auto-enrolment would achieve the twin goals of reversing the proportion of UK private sector workers who relying entirely on the state sector pension and it would also overcome people’s inability to make rational long-term decisions about investing for their future.

By providing a low-cost pension provider for small- and medium-sized enterprises it ensured employees in these firms would also benefit from this policy.

Putting the pieces in place
Two pieces of legislation were required to turn the Commission’s recommendations into legislation. The first, the 2007 Pensions Act, restored the earnings link to state pension and raised the pension age.

The second 2008 Pensions Act addressed the lack of private sector pension provision by creating the obligation on employers to enroll all employees as well as the creation of a new low cost savings vehicle.

Even though this policy had been developed and first implemented by a Labour government, roll-out of policy continued when the coalition government of Conservatives and Liberal Democrats came to power in 2010. This was a testament to the Commission’s ability to build cross-party consensus while it was road testing its policy ideas.

The next post will discuss how the policy was implemented from 2008 onwards.

Charlotte Moore - post author

Charlotte Moore has been a freelance journalist since 2006, with a solid technical understanding of a broad range of financial topics along with a previous incarnation as an investment analyst. Along with journalism, she has experience of producing written material for corporates and is seeking to expand this part of her business portfolio.