Olly

1. Pension schemes
• Basic State Pension
• Contract-base Pension
• National Employment Savings (NEST)
• Automatic enrolment
Automatic enrolment is whereby an employer automatically enrols
eligible employees into its pension scheme.
From 2012, a new duty placed on employers to enrol all eligible
jobholders. They have to meet certain quality criteria and make a
minimum contribution to that arrangement. Once enrolled,
individuals can opt

2. Default options is an example of Automatic
enrolment, in which firms automatically
enrol employees onto a ‘default’ Pension
scheme
A default option is the investment option, selected by the
pension scheme trustees, employer or provider, which is
used when an individual pension member does not
indicate an investment choice.
It is also not unusual for some pension members to
actively choose to invest in the default option.
There are a number of steps that typically occur in the
design, determination and selection of a WPP default
option involving different stakeholders.

3. Measures taken to increase enrolment in default
pensions
The Pensions Act 2008 sets out to encourage greater
private pension participation.
From 2012, changes to the system will be introduced
under which employers will have a duty to
automatically enrol all eligible workers and to make
contributions on behalf of those that do not opt out.
Under the terms of automatic enrolment, every
defined contribution (DC) pension scheme that an
individual could be automatically enrolled into must
have a default investment option.

4. Benefits to:
Firms
• Capital/ funds received from employees can be used to invest and
potentially make high returns or further growth in company
• It can help small businesses attract and retain qualified people
• More beneficial to larger businesses than small ones
Employees
• Employer contributions to retirement plans are tax deductible
expenses
• Enables retirement, possibly at an earlier age
• Sustainable income at a later age
• Better lifestyle
• Increased savings through pension
• Safety option if in an accident or sacked at an early age

5. Costs to:
Firms
• Uncertainy over company revenues
• Low worker demand
• High administrative costs
• Complex government regulations
• More costly to smaller firms
Employees
• Lower levels of disposable income
• Possibility of risk as pensions can be lost if employer collapses
and loses all its capital and liquid assets
• If pension is removed before the employee is 59 and a half years old in the
majority of pensions they are subject to an IRS penalty in addition to ordinary
income tax.

6. Why do people enter into it?
In reality the majority of will not select a specific investment option that matches
their individual needs but will instead enter the default option.
Psychological factors have been presented as an explanation.
Such as:
• The Existence of myopia
(tendency for individuals to be short-sighted in their planning),
• Procrastination and inertia
(tendency to put off, or stop thinking about the future
•General apathy
•A lack of confidence among individuals when it comes to making financial
decisions.
From the Economics literature ‘The Pensions Commission’’
The Government estimates that around seven million people are not saving enough
to meet their retirement aspirations.
‘Based on DWP modelling using data from the English Longitudinal Study of Ageing’

7. Default options objectives:
The structure of a default options is highly sophisticated as it has to meet several objectives:
Suitability – likely to be suitable for the majority of the members, in terms of its investment
strategy and asset allocation
Affordability - Total charges should be below the stakeholder price cap.
De-risking mechanism - By de-risking , a strategy which mitigates members’ investment
volatility appropriately over the lifetime of the product
Asset allocation - The default option should invest in a diversified portfolio of assets
Governance - holding regular reviews and communicating effectively with scheme members
These objectives together try to maximise the employees investment and create a efficient and
successful system that can suit the majority of people.

8. Conclusion
The new changes in 2012 may create a more efficient example as all employees are enrolled
and the effects will be clearer.
Most empirical evidence shows that with most employers, approximately over 80 per cent of
employees are likely to end up in the default option.
This means that decisions about the design of default options will impact upon a very high
proportion of UK employees after automatic enrolment is introduced.
Evidence suggests that firms who have over a 100 employees were more likely to use the
default options compared to smaller firms as the average employee is more suited towards
the default option.
Overall the default option has been successful for large firms but not smaller ones. The
reasons is because they are able to get their employees to participate mainly due to a lack of
information and psychological reasoning . Whereas smaller firms (employees < 100) only have
around of 29% of employees on pension schemes as its riskier and more costly for them. So
the employees who do enrol, enrol to the most specific pension for themselves.

9. • Has it been successful in raising the number of
participants
• Effect on global economy
• Stats figues ?
• Graphs?