* Experts see saving made compulsory in 2017 Pensions Review
* Cash-strapped workers opt out of voluntary schemes
* Australian, New Zealand mandatory schemes more effective
By Sarah Mortimer
LONDON, Jan 25 (Reuters) - Britain may soon have to force workers to start saving for retirement to cut a soaring pensions bill set to reach 120 billion pounds in 20 years.
The government wants people to pay into their own pension pots rather than rely on the state. But many employees, with limited disposable income, have been reluctant to do this.
A scheme, introduced last October, automatically enrolls staff 22 years or older into a company or national pension plan, but gives them a choice to opt out.
So if large numbers of workers pull out because they don't want to pay or can't afford the contributions, the government may decide to make membership compulsory in a Pension Review due in 2017.
"If opt-out rates are 50 percent or more, it is possible the government will suggest removing opt-out altogether and make pension saving mandatory," Paul Gilbody, head of defined contributions consultant relations at BlackRock Investment Management, said in a report called "Auto-Enrolment for UK Pension Schemes" by financial services research house Clear Path Analysis
The government's current pension legislation is an attempt to tackle the country's ballooning pensions bill, set to hit 8.5 percent of economic output by 2060, from 6.9 percent now.
Less than half of employees in Britain are putting money into a workplace pension scheme, the lowest proportion since records began in 1997, according to the Office of National Statistics.
Britain lags behind countries including Denmark, the Netherlands and Australia in global pension rankings. Its pension system ranks seventh out of 16 countries in a global comparison of national schemes, according to data from consulting firm Mercer. Its lowly ranking reflects an ageing population, low investment returns and large government debt.
The Department of Work & Pensions told Reuters it had no plans to introduce mandatory private pension saving, but it did need to compel millions more people to save.
The DWP said it expected 70 percent of people would stay in a workplace scheme and hoped to see 4.3 million savers in retirement schemes by May 2015 and between 6-9 million by 2018.
"One way or another, long-term pension contributions will increase," Paul Macro, defined contribution retirement leader at Mercer said. "The government are trying to stop people relying on the state to support them in retirement."
Under Britain's current so-called auto-enrolment system, employee and employer both contribute 1 percent of pay into a pension. But this will gradually increase to 5 percent from the employee and 3 percent from the employer by October 2018.
Someone earning 26,200 pounds ($41,400) a year, for example, would generate 4,667 pounds of employer contributions over 10 years, based on the auto-enrolment pension contribution guidelines, according to estimates by fund manager Fidelity Worldwide Investment.
Companies with more than 120,000 employees were required to start auto-enrolment in the second half of last year. For small firms employing between 50-89 staff the deadline is July 2014.
Eleven big companies, including supermarket chains J. Sainsbury and WM Morrison have introduced the scheme. But other large firms have not done so yet.
A spokesman for Morrisons told Reuters that one-fifth of their qualifying workers, many within 20 years of retirement, had opted-out of the workplace pension scheme.
The spokesman said Morrisons supported government efforts to get people saving for retirement. "We have a large proportion of our employees in their 40s and 50s and we want them to work on voluntarily not because they can't afford to retire."
A manager at fashion retailer Next said: "I figured I'm 27 and should start some kind of pension so I haven't opted out," she told Reuters. But she also said would pull out if the contributions had a big impact on her monthly disposable income.
If Britain does make pension saving compulsory, it will join a long list of countries that have tried to cut their pensions bill in this way.
New Zealand's KiwiSaver plan, launched in 2007, takes contributions from the government, employers and staff and locks the savings away until people turn 65, but there are exceptions for those buying a first home or in cases of hardship.
In 2009, 35 percent of people were opting out of the New Zealand scheme but that has dropped to 6 percent in 2012, David Knox, senior partner of Mercer Consulting (Australia) Ltd, said.
Australia's government introduced a compulsory pension system in 1992 which set up state-supported superannuation funds, where employers are required to put in 9 percent of staff salary. That is due to increase to 12 percent by 2020.
"People in Australia and New Zealand are now more engaged with pension saving - there is general acceptance that you can't rely on the government to fully support you in retirement," Knox said.