Vad slides

2. Compulsory Pensions
• Theoretical concept where the employee can’t opt
out of having a pension scheme
• Default options are seen as a halfway house
between no legislation on pensions and a full on
compulsory pension.
• Australia is the only big economy to currently have
such a system in place, but the introduction was
more due to political reasons.

3. • Low level of retirement savings can be
explained by high rates of time preferences,
especially for younger people.
• A traditional approach to certain types of
market failure is compulsion.

4. • “lock ins” are most likely to be regarded as very
desirable by those who are prone to
procrastination or time inconsistency.
• Such consumers may also resist compulsion given
their preference over current consumption, over
self-controlled mechanisms.
• may unwind the impact of compulsion by reducing
voluntary savings or even worse by increasing debts.

5. • Research on this issue has given a really mixed
response:
• over 40% of those who were already active pension
members believed that “that all employees should
be forced to contribute to a pension”
• But only 20% of those who were not currently
contributing agreed to that statement.

6. • In another study, of those currently contributing to
a pension, around 20% agreed strongly that “the
government should make it compulsory to pay into
a pension” and another 32% agreed slightly.
• Almost half however, disagreed.

7. • In addition to an even split of opinion on the
matter, there appears to be other issues concerning
a fully compulsory pension
• If compulsion is applied to a particular type of
pension plan (such a RRSP) households, would
inevitably substitute the compulsary component for
other types of saving if they are undertaking some
saving already.
• In welfare terms, this could lead to some
households ending up worse off.

8. • Similarly, if the compulsory rate becomes a
new benchmark for “adequate” savings,
those who are contributing more may
consider that they are saving too much,
and so reduce their savings.
• Thus a full on compulsory pension scheme
wouldn’t really work in the United
Kingdom.