Taking steps to restore faith in pensions sector

Alistair McArthur, The Scotsman

December 7, 2003

The Queen’s Speech at the opening of parliament confirmed that the government intends to introduce legislation to protect workers’ retirement funds if their companies go bankrupt.

Employees are pushing for the introduction of compulsory investment into pension plans to avoid poverty in old age, and the government says the new regulations, due to come into force in 2005, will make sure workers receive a decent pension.

"Legislation will be introduced to encourage employers to provide good quality pensions, and individuals to save more effectively for their retirement," the Queen told parliament.

A pensions protection fund is to be set up to protect employees and pensioners if companies become insolvent.

A report by research group Datamonitor says about 71% of people in pension schemes say Britons should be forced to save to plug a £27bn gap between what they put aside and what they need for an adequate retirement income.

Nicholas Stephens, author of the report, says: "It is now up to individuals to save. If they are not doing it, some people agree they should be made to do so. It is becoming increasingly clear there are shortfalls for individuals when it comes to their retirement."

The Datamonitor survey also found 12% of respondents said compulsion was not needed, 11% rejected it as another type of tax and 6% had no opinion. 

But compulsory pension saving has prompted opposition from business groups such as the Confederation of British Industry, while the Trades Union Congress has said it supports compulsory pension saving for workers and their firms.

The Datamonitor poll findings come as policymakers wrestle with a pensions system creaking under the strain of an ageing population, the three-year fall in equity markets and the closure by companies of hundreds of final-salary pensions for new staff.

Earlier this year the government set up a pensions commission to explore options for reform, including compulsory pensions saving. The Inland Revenue is also proposing to sweep up the existing mix of pension and saving tax codes into a single system to promote saving.

One idea put forward is for industry sectors - such as the media and manufacturing - to set up collective pension schemes to protect employees against poverty in old age.

Mick McAteer, senior policy adviser at the Consumer Association, said last week that trade unions, government departments and consumer lobby groups should set up these pension schemes, into which people should be compelled to save.

"As a nation, we are not investing enough at any level - the government, employers or individuals," said McAteer.

"We have to take action to prevent the pensions crisis becoming a national catastrophe in the future.

"We need an industry-wide scheme or a collective not-for-profit national pension scheme which will benefit from economies of scale and compulsory saving plans."

He added that consumer confidence in pension schemes was at an all-time low because of the proliferation of corporate governance scandals and a volatile stock market.

New industry-wide pension models would restore trust because they would run as not-for profit organisations with a board of trustees and consumer and employer representatives.

Retail pension insurers find it hard to deliver pensions which benefit consumers and taxpayers and also meet shareholder demands, while employers are no longer guaranteeing final-salary schemes.

McAteer said: "The nation must save and we see no alternative to compulsory saving which forces people to invest in their future and which is fair and cost-effective."

But not everybody is behind the need to make pension contributions compulsory.

Steve Bee, head of pensions strategy at Scottish Life and its parent company, Royal London, believes that is not the government’s intention. He feels the government’s idea is to rebuild confidence in the pensions industry and help people plan for their retirement, building on the strength of the voluntary system.

"That sounds like a vote of confidence in the voluntary system that we have here in the UK and that’s good, that pleases me," says Bee.

"There’s never been a law in this country forcing employers to set up and contribute to pension schemes for their employees, yet they have done so voluntarily and to the extent that we are the most pensioned people in Europe."

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