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Non-contributory pensions may be all carrot and no stick

by William Robins on Jan 24, 2012 at 11:17

Non-contributory pensions may be all carrot and no stick

With auto-enrolment around the corner, advisers of corporate clients might be tempted to recommend a non-contributory pension; but beware, because people tend not to value what they do not pay for.

A non-contributory pension scheme means the employer makes contributions even if the employee pays nothing. It may seem an ideal opportunity to attract people into the scheme early. By the time they start contributing, they already have a pot, rather than missing out because they waited.

With auto-enrolment, for those worried that high numbers could opt out, a non-contributory scheme would be more attractive, bringing high membership and becoming a valued benefit. Experience, however, tells a different story.

Vicky Harrison (pictured), business director at Teeside-based WR Financial, which provides advice to staff in the workplace, says non-contributory pensions lead to throwing good money after bad.

Lack of engagement

‘We don’t have 100% take-up for any of our non-contributory schemes, which is baffling,’ says Harrison. ‘Even getting the basic information from them to set it up is impossible. People are reminded three or four times but if they don’t want to fill in the forms there is no point.

‘People do not value what they don’t have to pay for. With matching contributions, people appreciate [the pensions] but, if not, they do not appreciate a 3% to 5% pay rise for doing nothing.’

Harrison says she would not recommend a non-contributory pension to any employer on the basis of strong take-up. ‘We also advise employers, and we say to them that even a minimum 1% contribution will make them think about the benefit.’

Can auto-enrolment turn the problems of non-contributory pensions on their head? Auto-enrolment uses inertia. It is designed around employees not bothering to opt out of the scheme. There is no point in having high take-up, though, if there is still low engagement.

Nigel Aston, business development director at research firm PensionDCisions, warns low engagement leads to poor outcomes at retirement, causing pension funds to be small because they have never invested more than the minimum and received only basic contributions.

Non-contributory pensions could be a honey trap: the workers will remain blissfully unengaged until they retire with a meagre pot they did not pay for and never cared about. 

2 comments so far. Why not have your say?


Jan 24, 2012 at 11:58

First question. How many employers out there can suddenly find an additional 8% of their salary roll to pay into a pension scheme if they are not already doing anything?

Second question. How many employees are going to be able to afford 4% of their salaries to a pension scheme however good it is dressed up to be.

It is not so much down to value as "affordability".

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Jan 24, 2012 at 13:47

the problem appears to be the "message" rather than value or affordability.

neither of which apply- pension cost is no differenct from rent/mtg payments

to keep a roof over their heads/ pension puts a roof over their retirement.

I would allow the employee's some intelligence-and go that stage further in

explaining to them. I think the policy is badly programmed by gov- suggest

take a look at what the Chinese have done ?- and they are communists not

capitalists. where have all the great original thinkers gone-who set up the

welfare state. And equally is it not time to consider splitting NHI contributions

into NHI and pension contribution with later borrowed by gov at reasable rate

to give return / save them borrowing ? and we would all " be in it together".

A much better plan than combining tax and nhi ??

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