I have been intrigued today to hear the Labour leader, Ed Miliband’s, policy announcement regarding union membership, and affiliation fees to the Labour party. And whilst purely political announcements have no place on this employee benefits blog, it’s almost impossible to ignore the parallels (or to be more precise, the exact opposite of parallel) with the current direction of travel in the pensions industry. By direction of travel I am referring, of course, to pensions auto-enrolment.

Whilst auto-enrolment has always had broad cross-party political support, the initial impetus to turn this into reality came from the the last Government, a Labour party administration. But why was this so?

There are many thousands of words dedicated to this subject, as any search of the Internet will reveal. But in simple terms, left to their own devices people just tend to put off joining a pension scheme. This is sometimes even the case when the employer makes a generous pension contribution, and does all they can to encourage the employee to join. In other words, it’s easier to do nothing than take a conscious decision to actively save for old age.

Auto-enrolment changes this dynamic completely. The inertia that used to prevent people from joining pension schemes, now results in those same employees achieving scheme membership, and even contributing towards their retirement (albeit at minimum levels). Although it’s very early days, it already appears that this approach is working, with remarkably low levels of employees reportedly opting-out of pension saving after they have been auto-enrolled.

Given that the Labour party both understand the theory of why auto-enrolment works, and will also be aware of the low opt-out rates in pensions being reported thus far, it seems quite surprising that Mr Miliband is proposing to do exactly the opposite on Labour party contributions received via union membership. At present, most unions assume that all members will pay the affiliation fee to the Labour Party, unless the member opts-out of the process. Miliband is now suggested that union members will now have to actively opt-in to continue to contribute to Labour Party funds.

So this is a big gamble for Mr Miliband, given that these contributions make up a sizable chunk of the Labour Party’s annual income. Or is it?

One of the factors that must have been considered by the Labour Party leadership was the possibility that those union members who opt-in to pay the affiliation fee are, almost by definition, likely to be more active in their support for the Labour party. After all, few will opt to pay the fee if they have no interest in Labour policy. It’s therefore possible that the Labour Party may end up with far fewer members contributing, but a greater engagement, activity, and even higher contributions from those that do. And that may offset the initial loss.

And here too there is a (slightly more tortuous) parallel with the world of pension.

Prior to Auto-Enrolment, and despite the very best efforts of both good employers and the pensions industry, only around a third of the UK’s working population were actively saving for retirement. Those that did join company pension schemes have often benefited from generous employer contributions, and often equally generous tax advantages to encourage them to save more. To put it another way, an engaged and sizable minority have reaped the majority of the rewards of pensions prior to auto-enrolment. And Mr Miliband must hope that the Labour Party will benefit from an engaged minority in the same way.

So it appears that the Labour Party’s own funding is running in exactly the opposite direction to the pensions legislation they help set in train, and the theory they embraced to action this. It remains to be seen if Labour’s gamble will pay off.

But back in the world of pensions, it already seems clear that auto-enrolment is leading to an increase of savers right across the UK. Auto-enrolment is the first, important, step towards narrowing the UK Savings Gap.

The next step in the process will be engagement. New pension savers, and employers, will need to engage with, and understand, what pension outcomes are likely to be. And once this is understood, it will be important that both parties appreciate how they can help influence and improve that outcome.

But that’s one for another post…

Best regards

Steve