The UK Government's Big Fat Pensions Paternalism Conundrum

The UK government has boasted that its batch of pension reforms is a "revolution", which will give savers more choices and enable them to do what they please with their retirement money.

The move, which means defined contribution (DC) pension savers will be able to withdraw their total pension pot in cash and without an annuity, will please right-wing libertarians who loathe paternalism.

But the Chancellor's bombshell budget pension proposals come after the government's massive campaign to promote auto-enrolment, arguably one the biggest "nanny-state" policies a British government has ever implemented.

Auto-enrolment has been introduced because Britain has a savings problem. Not enough businesses offer workplace pension schemes, and it seemed employees are not interested in the retirement options.

According to research publish by the Association of Consulting Actuaries (ACA) before the implementation of auto-enrolment in 2011, two thirds of small firms in the UK did not offer a scheme.

In addition, the Office for National Statistics (ONS) revealed last year that the number of people in an occupational scheme dropped to 2.7 million – a measly amount when you consider numbers peaked at 8.1 million in the late '60s.

Clearly people's inertia was a big problem and back in 2008 New Labour introduced the Pensions Act which set out the auto-enrolment scheme. The programme gained cross-party consensus and now, under the Coalition Government, all employers with UK-based staff will need to automatically enrol all eligible workers between 2012 and 2017.

This reform has been described in some quarters as "soft paternalism or libertarian paternalism". This is because workers can opt-out of the scheme, rather than being forced to contribute to a pension they don't want.

This is politically attractive to the libertarian minded folks over at the government. The "soft paternalism" appeal is so strong that they've even set up a "nudge unit" to gently push people into making the right life choices.

The crack squad of "nudgers", otherwise known as the Behavioural Insights Team, enables Thatcherites to claim they're taking on the "nanny state" while telling people, however subtly, what to do.

Of course, it's all a load of cobblers. There's no such thing as "soft paternalism" – you either intervene in someone's life or you don't. The big problem is what happens when you set someone on a course they won't alter from?

Under auto-enrolment a slice of an eligible worker's pay packet is pumped into a pension pot and employers must pay into the scheme as well. To start with the company only has to pay in a minimum of 1% and an employee 0.8%, and then the contribution levels will eventually rise to 3% for employers and 4% for workers.

The issue is that these contribution levels won't be enough and when a person comes to retire, naively thinking that their pot will be big enough for a nice cruise around the med' and few margaritas, they will have a very, very nasty shock. This is a very real problem. So far opt-out rates have been low, suggesting people are still stuck in a state of "pensions inertia" and probably won't increase their savings from the minimum level. So down the line that nudge will look more like a push, a push over a big nasty cliff.

But now, with the "pension revolution", we're told the government is tackling paternalism. The Chancellor's proposal means 13 million savers at the age of 55 will have "complete freedom" to take their whole pension pot as a tax-free lump sum from 2015 and nobody will have to buy an annuity.

It makes you wonder, has the government unleashed behavioural forces it doesn't understand?