Nest Insight’s Matthew Blakstad says despite the fundamental differences between the pension systems in the UK and the US, the two countries could both benefit by sharing common solutions to encourage employees to save more for their retirement.
Both have seen a steady drift from defined benefit to defined contribution. Both view state retirement benefits as an underpin for private savings, and use ‘soft compulsion’ approaches like auto-enrolment to get people saving. Yet these similarities mask a raft of fundamental differences in approach, design and culture.
In the UK, auto-enrolment policy has extended private retirement saving to more than 10m workers.
Despite the fact that it was American academics and employers that inspired this nationwide approach, US workers face a polarised experience, depending on which employer they work for and where they live.
In both countries, the underlying issue is people’s strikingly low levels of liquid savings
A number of states, including Oregon, Illinois and California, have recently put in place their own auto-enrolment plans, along with legal mandates on employers to enrol their workers. This is good news for these workers, but less so for those in neighbouring states.
This approach also misses out on the vast economies of scale provided by a national plan. Indeed, at the Aspen Institute’s recent Leadership Forum on Retirement Savings, there was general agreement around the idea that a national programme is needed in the US.
US legislators face significant hurdles, though, in emulating the UK reforms, which depended on a consensus between political parties, employers and industry. Proposals have repeatedly crashed against the twin political rocks of employer mandates and government-backed provision.
However, we should bear in mind that consensus was far from certain in the UK, either. We recently worked with the University of Bath on an oral history project, which showed how the choices of a few key actors helped mark out common ground for the reforms.
In the US, too, there are now signs of progress. Its Setting Every Community Up for Retirement Enhancement Act was recently signed into law with wide support from both parties. It encourages employers of all sizes to put auto-enrolment plans in place.
Still, permissive measures are unlikely to achieve system-wide change. By comparison, the Saving for the Future Act proposes more sweeping changes, including mandatory employer contributions.
This point about contributions matters. The average opt-out rate for workers enrolled into Nest is around 10 per cent. Early data from CalSavers suggests an ongoing opt-out rate of well above 20 per cent.
Any number of separate causes might explain this difference, not least the effects of healthcare costs and student debt on US workers, but we cannot ignore the impact of employer contributions.
In the UK, worker contributions are effectively doubled by the employer and any tax relief. In CalSavers there is no employer match. Even in the auto-enrolment world, financial incentives play an important role.
In Nest, it is often the smallest UK employers who make the most generous contributions.
Yet in California, and all plans using the state-run ‘auto-IRA’ structure, the employer is not allowed to contribute. This and other restrictions were applied to auto-IRA plans to stop government-backed arrangements stifling competition. Yet there is a risk this feature may also stifle participation.
A final difference between the UK and US systems is accessibility. In the US, a participant can usually withdraw money from their DC plan, or borrow against it.
In the UK, this asset is locked away until their 55th birthday. This could mean financial distress if the individual suffers a short-term financial shock, unless they have built up some liquid savings elsewhere. In the US, it is not that people cannot access their pension money – but that they do so all too often, with 30-40 cents leaking out of the system for every dollar paid in.
In both countries, the underlying issue is people’s strikingly low levels of liquid savings. Nest Insight is addressing this challenge by trialling a sidecar savings approach. CalSavers has introduced a liquid account to hold the first $1,000 (£810) of every participant’s contributions to be available in emergencies.
The Saving for the Future Act would allow a worker to pay into a rainy-day account, and in return get a two times employer match paid into their retirement pot.
Whatever approach proves successful, our countries will benefit if we share solutions to our common challenges.
Matthew Blakstad is analysis director at Nest Insight
