· 2 min read · Features

What would be the effect on the UK pension industry if US style 401K pension arrangements were implemented?


There are pro's and con's to changing to a 401K type system, as has been suggested by the Conservative party. On the positive side, more people would potentially save (and those already doing so would perhaps even save more) into pensions if they thought they could have access to the funds if they really need them prior to retirement. The system could potentially be far simpler for people to understand, plus it could potentially make compulsion a more palatable proposition.

But, given these, would people be tempted use all their funds prior to retirement if they had access to them? Would pension scheme charges need to go up to account for funds being withdrawn earlier than anticipated? And because we live in a country with more historical state support than the US, would people withdraw and spend funds to put themselves back into a position or receiving ‘means tested' state benefits if they were allowed to?
It seems to me that the biggest issue to changing to a 401K type system is that in the United States, people are conditioned to expect little from the state, whether that's healthcare, university/college fees or retirement support.
Put simply, in the US, people pay lower taxes, but look after themselves. In the UK, we pay higher taxes, and get state support, which covers a minimum acceptable level of health, education and retirement.  
A change for us to an American style of retirement savings would need a complete change in social expectation towards state responsibilities and an individual's.
Two examples of this diametrically opposed culture from opposite ends of the ‘pond' are: 
The determination of a large section of the US not to even consider a form of National Health Service. They staunchly believe that individuals should save or self-insure if they want to expect good healthcare and any variation from this will cause the standard of overall healthcare to crash. The suggestion that they should move to a more British/Canadian system has been met with a defiance usually reserved only for anything thought to be endangering the constitution (e.g. the right to bear arms).

Public sector workers in the UK perceiving a very generous and expensive final salary pension as a right because they feel they have lower comparable wages those in the private sector  (even though there is an argument that they already benefit from higher job security). With the UK in the worst financial situation in the living memory of most, the capping of future final salary liabilities of the public sector in return for a defined contribution alternative could be an enormous help to putting the books right, but even a mention of this has union representatives running for an interview with radio 4 & 5 and the threat of indefinite strikes that could cripple the economy.

Also, if people did use their funds early in the 401K-style arrangement, would we accept that there would be little if any state support (as they do in America)?  This could cause tranches of society retiring to real poverty.  Potentially we would have to unpick our whole social fabric to make this work.
This hasn't even taken into consideration that we could end up with large numbers opting not to retire into this poverty. Employers could find themselves stuck with an ever-aging workforce that cannot afford to retire and they potentially can't force to do so because of age discrimination rulings.
What looks like a nice idea on the face of it, could actually end up having the opposite effect from that of relieving the future burden on the state for retirement provision.   We could, in fact, see many spending their savings early and being left with nothing at retirement (unless you believe that we are capable of going through some sort of social metamorphism).    
This idea, if introduced in isolation, could eventually leave an even higher dependence on state provision, or retirement cardboard box cities springing up all over the country.    
Given this expectation on state support, perhaps there is no alternative for us but to follow the Australian lead of making contributions truly compulsory, rather than soft compulsion through personal accounts whilst continuing to restrict access to benefits.   
This would require a brave move from someone, but perhaps with a five-year mandate to govern and such an unpopular Labour party in opposition, someone might just bite that bullet?  

David Hix, associate director, Jelf Employee Benefits