The Automatic Savings Model Could Be a Lifeline for Generation Z’s Retirement

The share of pensions from the first pillar is expected to fall from 45 percent of salary today to below 24 percent when Generation Z retires, and given the worsening demographics, it could be even worse, wrote the chief economist of the Croatian Employers’ Association (HUP) Hrvoje Stojić on his LinkedIn profile.

– Imagine being automatically enrolled in the third pillar. You don’t have to click ‘I agree’ to save more for your total assets. This is the essence of opt-out model that has been successfully functioning in the United Kingdom, Latvia, and New Zealand for years – Stojić continues, noting that the minimum contributions from employers and the state through incentives significantly increase the inclusion of young employees, women, and low-skilled workers, that anyone can opt out whenever they wish without penalties, but that most remain, which changes pensions in the long term.

– In the UK, the number of people enrolled in the third pillar has increased from 47 percent in 2012 to over 85 percent in recent years. In Latvia, it is close to 50 percent and will continue to grow. In Croatia, by comparison, less than 25 percent of employees use the third pillar – writes Stojić.

But what do they think about all this at the Association of Pension Fund Management Companies and Pension Insurance Companies (UMFO)?

As they told us, pension companies continuously conduct information and education activities aimed at raising awareness about the importance of saving for retirement and ensuring financial security in the future. Initiatives and proposals are based on analyses of European and global practices and on the recommendations of relevant institutions, such as the European Insurance and Occupational Pensions Authority (EIOPA), in accordance with applicable national legislation.

– Voluntary pension savings represent an effective and long-term profitable instrument for financial security in the third age. Although it is based on the personal decision of the individual, its development has broader social implications, from relieving the public pension system to strengthening the financial stability of future retirees. It is important to start this practice as early as possible, preferably at the first employment, to take advantage of all the benefits of long-term investment – claim UMFO.

They confirmed to us that the model of automatic enrollment in the third pension pillar (so-called autoenrollment), which would automatically enroll all new employees, with the option of voluntary opt-out, has shown strong results in increasing the number of citizens involved in pension savings in several European countries, such as the United Kingdom.

– EIOPA data confirm that such a model, with clearly defined criteria and appropriate protective mechanisms, can significantly contribute to the long-term financial stability of citizens. Demographic trends clearly indicate the necessity for additional measures. It is projected that in the European Union there will be only 1.5 employees for every retiree, while this ratio in Croatia is already at 1.4 – with predictions of further decline. This reality further emphasizes the importance of strengthening pension savings, especially among younger generations, including the so-called Generation Z – emphasize UMFO.

– In Croatia, the third pension pillar is based on the principle of voluntariness. However, we believe that introducing an automatic enrollment model, while retaining the right to choose and the option to exit the fund, could further encourage citizens to save for retirement in the long term, without undermining the voluntary nature of the third pension pillar. The success of such a model largely depends on the level of financial literacy of citizens and on incentive measures, such as tax breaks for employers who enable their employees to save in the third pillar. Additional tax benefits could significantly increase the number of users, thereby contributing to the financial security of individuals, which is not only a personal responsibility but also an important social interest – conclude UMFO.