Discussions continue in Canada on the proposed Pooled Registered Pension Plan (PRPP).  A number of countries have already implemented similar plans.  The U.K. has just launched theirs today(1).  The new supplementary pension plan (SPP) has not been welcomed by everyone.  Although the intention is to make is easier for individuals to save money for their retirement, the forecasted results are not positive.

The Concept of Auto Enrolment

Studies in the field of Behavioural Economics have determined that when too much choice is offered there is increased likelihood that no decision will be made.  The assumption is that employees are unable to make a decision about investment products due to the overwhelming number of choices and they defer the decision, sometimes indefinitely.  The outcome is minimal savings for their retirement years.  By creating an automatic process, the employee can accept the decision made by the employer (this assumes the choice is prudent).  For those employees who wish to make their own investment decisions there is an opportunity to create their own investment portfolios from a variety of options.  For those employees who do not wish to save for their retirement, there is an opt-out option.  Opting out would require the employee to made a concerted effort and most employees ignore their pension plans.  For the most part this means that the majority of employees are likely to save for retirement using the default auto-enrollment option.

The Opportunity of Lower Fees May not be Achieved

The concerns that are being expressed about the newly introduced supplementary pension plan is that the savings in fees may not be realized by most employees.  The intention of offering these plans was to be able to negotiate more attractive fees that would normally be available to an individual investor.  This makes sense only if the employee in the supplementary pension plan chooses a plan with lower fees.  The forecast is that employers will not have the time to create lower fee plans as part of the auto-enrolment package and employees will be placed into existing offerings.

The effect of higher investment fees is illustrated in the Telegraph article (1):

The difference means that a worker with a salary of £25,500 who saves into a pension for 40 years would get an annual income of £3,500 a year if they save in a default scheme. This compares to a pension of £7,000 a year if they save with a low-fee company such as NEST.

This difference is not insignificant.  Once again this illustrates the importance of educating investors before they make an investment decision.  In my opinion, employees should be required to take a short course on investing, fees and risk before they make their pension plan choices.

(1)  http://www.telegraph.co.uk/finance/personalfinance/pensions/9600108/Millions-could-see-retirement-income-halved-under-pension-auto-enrolment.html