Tuesday 16 January 2018
A report assessing the projections and economic impact of a proposed system of automatic enrolment into private pension saving and a new Secondary Pension Scheme has been published today.
In February 2016, the States of Deliberation approved a report from the then-Social Security Department which outlined proposals for a new system of automatic enrolment into private pension saving for working age residents of Guernsey and Alderney, who do not currently have a private pension, and the development of a new Secondary Pension scheme.
The Assembly directed the Committee for Employment & Social Security to report back to the States of Deliberation with detailed proposals for implementation and an economic impact assessment of the proposals. BWCI Consulting Limited was appointed to carry out the actuarial projections and worked in conjunction with Island Global Research Limited to produce the economic impact assessment. The scheme is expected to commence from 2020.
Under the projections outlined in the report, it is estimated that 20,200 residents of Guernsey and Alderney will be auto-enrolled into a private pension scheme. It is important to note that membership is not compulsory and individuals can choose to opt out of the scheme. Based on an estimate that 20% of individuals will choose to opt out, it is projected that 16,200 residents of Guernsey and Alderney - 39% of the working population - are expected to have the opportunity to save for their retirement in a private pension scheme for the first time, as a direct result of these reforms.
The majority of those individuals are expected to be automatically enrolled into the States-facilitated Secondary Pension Scheme, although some will be automatically enrolled into alternative private pension schemes via their employer which meet a qualifying scheme test.
The projections suggest around 12,200 islanders will not be automatically enrolled due to their income being less than the lower earnings limit (2018 rate: £7,176 per annum). It is expected that the States of Guernsey will be able to target its resources to those lower earners through the Income Support Scheme, as a result of the long-term goal of these reforms meaning less people will rely solely on the Old Age Pension.
Assets of the States-facilitated scheme are expected to grow up to £1.3billion over the first 50 years of operation. In contrast to social security contributions paid into the Guernsey Insurance Fund from which the Old Age Pension is paid, the funds held will remain the individual members' own money and will become part of their estate in the event of their death, either before or after reaching pensionable age.
The BWCI report illustrates that the pension fund of a lower quartile earner at retirement is expected to be worth around three times what the member has contributed.
Once the scheme is fully established, employees will contribute 6.5% of their salary into the scheme, with employers contributing 3.5%. It is anticipated that employers who do not currently offer a pension scheme will, in most cases, incur additional administration expenses which are expected to be primarily time costs rather than monetary.
BWCI's report also projects that the introduction of auto-enrolment would result in a small reduction in consumer spending in the short term, as a result of members having less disposable income. However, as retirement income increases, consumer spending is expected to increase at that stage. The report also indicates that the magnitude of the impact is likely to be relatively limited, and the risks will be small compared to other economic challenges, such as the potential impact of Brexit.
Deputy Michelle Le Clerc, President of the Committee for Employment & Social Security, said:
"The Old Age Pension was only ever intended to provide a basic platform level of retirement income which, at a full level represents an income replacement rate of 40% for a lower quartile earner. The projections show that, with the introduction of the proposed auto-enrolment system, an income replacement rate of about 80% can be achieved. We are pleased to see that this exceeds the target income replacement rate as recommended by the UK's Pension Commission.
While the impact on individuals is overwhelmingly positive, we recognise that there are circumstances where people would prefer not to be a member of the scheme. As such, the scheme will not be compulsory and everyone will retain the option to opt out.
While some employers might find the prospect of an additional cost worrying, we are committed to developing a low-cost scheme with minimal administration burden to limit the impact on employers."
The introduction of the auto-enrolment scheme will also reduce government revenue, through a reduction in income tax as a result of Secondary Pension Scheme members receiving tax relief on pension contributions.
Deputy Gavin St Pier, President of the Policy & Resources Committee, said:
"Once the scheme is fully established by 2027, the net effect at that point is expected to represent a decrease in personal income tax revenue of around 1.5%. This will need to be planned for by the States through the discipline of the Medium Term Financial Plan. But it is in the best interests of the community as a whole that we do so, as the expected living standards that it will produce for members in the longer term is well above that which could be reasonably expected by individuals relying on the Old Age Pension and Income Support as their sole retirement income."