You have to say this about the Brits: In the face of past failures and major challenges in turning all of the nation’s employees into savers, the country that kept calm and carried on during World War II is making real progress with its new auto-enrollment pensions initiative. As policymakers and advocates in the U.S. struggle to provide universal retirement benefits, there are lessons to be learned from our brethren across the pond.
With that goal in mind, while I was in London last week I stopped by the National Employment Savings Trust (NEST) for a status report on one of the world’s newest — and most ambitious — national retirement savings programs.
In 2008 the U.K. government moved to extend retirement savings plans to millions of uncovered workers by mandating that all companies, large and small, offer plans and automatically enroll employees in them. The government expects that pension reform will cover as many as 10 million additional workers by the time the law is fully implemented, in 2018. Savings by those workers could total £11 billion ($16.8 billion) a year, or roughly £1,100 per worker on average, according to the U.K. Department for Work & Pensions.
So it was with equal measures of curiosity and admiration that I approached NEST HQ last Tuesday morning. The sun was glinting off the rolling waters of the Thames directly in front of the building where NEST staff occupy two floors. Located across the river from the City of London, the savings trust is a mere stone’s throw from Shakespeare’s Globe and a quick hop to the Tate Modern museum and the Millennium Bridge.
I was ushered into a conference room with a lovely view of the river to meet with Paul Todd, NEST’s assistant director of investment, and to hear the high points of the program that was launched in October 2012. Todd, a rising star in pensions policy, has been with NEST from its earliest beginnings, in April 2008, as the Personal Accounts Delivery Authority. NEST was created out of PADA to backstop the national auto-enrollment program and provide an alternative to employers who do not choose an insurance company or other retirement fund manager.
“The founding principle,” said Todd, “is it shouldn’t matter what kind of employer or job you have. You should have the right to access a reasonable pension scheme with reasonable fees and reasonable quality at a reasonable price.” Although many in the U.S. would agree with this belief, it is far from universally accepted. For that reason, the Brits have pulled out in front of the U.S. in the global race to develop a population with enough assets to retire on.
One of Todd’s key concerns is keeping fund costs to a minimum. To that end, the team looks at every facet of the defined contribution model for potential cost savings.
NEST’s target-date investment funds provided a ripe opportunity to reduce costs. Instead of the usual five-year tranches that U.S. target-date funds group members into, NEST sets up a distinct fund for every possible year up to retirement. “It allows us to be very forensic about the specific risk and asset allocation we want to take for a small peer group,” said Todd. This is not a “set it and forget it” operation, he continued. Rather, the investment staff can be flexible in taking views on how markets are developing and implement changes within a particular fund.
NEST has found other ways to keep trading and transition costs to a minimum. In the U.S. model, target-date funds adopt a so-called glide path of equity selling and bond buying as plan participants begin nearing retirement age. NEST eliminates these frictional costs by selling equities to its own, younger plan members. “Target-date funds are for us a delivery vehicle,” noted Todd. “You can do them well or poorly.”
NEST also finds savings with the asset managers who invest its large and growing pooled accounts. Rather than hold them to short-term performance hurdles, NEST is building long-term, sustainable relationships with firms like UBS, State Street Global Advisors, Legal & General Investment Management, Royal London Asset Management, Northern Trust Asset Management, BlackRock and HSBC Global Asset Management. “We’re not chasing after alpha all the time,” Todd explained. “Being able to have mature conversations with asset managers gives them confidence.”
NEST is the U.K.’s largest auto-enrollment scheme, but by no means the only one. Make no mistake, Todd said, “we’re operating in a competitive environment. Employers have choices about which pension scheme they pick.”
I had the opportunity to catch up with one of NEST’s competitors, who stopped by my hotel to share his take on the latest news about auto-enrollment and the competitive environment. “When the auto-enrollment idea was introduced, the existing providers said, ‘We’re not interested in this market,’” explained Morten Nilsson, CEO at auto-enrollment scheme provider NOW: Pensions, a U.K. subsidiary of the Danish national pension fund ATP. “And suddenly they were.” Nilsson, a transplant from Denmark, established NOW: Pensions in May 2010 to bring ATP’s advantages to the British workforce. With its low annual fee of just 30 basis points (NEST charges 50) and a single, diversified default fund based on ATP’s Danish fund, NOW: Pensions has enrolled 500,000 members.
Nilsson agreed that one of the biggest concerns in setting up auto-enrollment was that retirement plan providers would shun the lowest-paid employees. Those fears are proving unfounded, he added. NEST’s primary role is to make sure all of these workers are covered, but NOW: Pensions hasn’t turned anyone away either.
As the U.K. continues to roll out its savings program in stages — June 1 is the beginning of a “test tranche” of the smallest employers — NEST remains a work in progress. Although it has enrolled 2.1 million members out of a total of 5 million new savers nationwide, it has only £473 million in assets, or roughly £225 per member. That reflects an initial contribution rate of just 2 percent of salary. But when the auto-enrollment system has 10 million people contributing 8 percent, which the rate is scheduled to hit in 2018, it will get to billions very quickly, said Todd.
Follow Frances Denmark on Twitter at @francesdenmark.
