Compulsion moves up the pensions agenda
Hunter, The Money Telegraph
When he was pensions secretary,
Alistair Darling, one of the most astute political operators in the Labour
cabinet, was convinced that forcing people to save for their retirement
could cost his party the next election.
In his view, while people claimed they
wanted to save, the reality was that they did not. They would much rather
spend their cash on holidays, homes and cars. And any government that
prevented them from doing so by forcing them to save would find itself out
Times appear to have changed. The word
"compulsion" was on everyone's lips at last week's Labour party
conference in Bournemouth.
In his speech, Gordon Brown, the
chancellor, said he "welcomed the debate on compulsion". And the
economic secretary to the Treasury, Ruth Kelly, openly acknowledged at a
fringe meeting that if the strategy of free choice could not be made to
work, the Independent Pensions Commission, set up earlier this year to
investigate pensions issues, had the power to impose compulsory pension
In a frank departure from normal
ministerial platitudes, Kelly accepted that the regime was not working,
largely because of a lack of trust in the financial industry, but partly
due to general confusion.
"It is almost impossible for
anyone to make rational choices right now," she told the meeting.
"Consumers don't know what they are getting by way of pension
entitlement either from their employers or from the state. These are huge
She revealed that the Treasury was
working with the Financial Services Authority to develop a "financial
health check", which could be made available to every employee at
their workplace. There were also proposals to provide every employee with
an annual statement outlining precisely what he or she could expect to
receive at retirement from private and state pensions.
Kelly concluded: "We want a
strategy of informed choice. But, if that doesn't work, we have the
Pensions Commission, and compulsion is always an option for them."
This buck-passing message was echoed in
a speech to the main conference by Andrew Smith, the work and pensions
secretary. He said compulsion had to be left to the new independent
commission, adding: "We would not have set up the commission if we
did not think there was a case for moving beyond the current voluntarist
So compulsion is back on the table. But
how seriously should we take it? Are ministers really testing the waters
of public opinion, or are they merely sabre-rattling, using empty threats
to encourage us to save more of our own volition?
Compulsion has some powerful allies,
including charities for the elderly, the Consumers' Association and many
of the big trades unions, which last week called for compulsory employer
Following pressure from the GMB, Labour
party officials were reluctantly forced to include the following in the
motion on pensions debated on Thursday: "This conference resolves to
widen the pensions debate and calls on employers - as well as individuals
and the state - to play their part in eliminating poverty in retirement
via compulsory employer contributions to pension schemes."
The motion was passed overwhelmingly.
Politicians from all parties remain
skeptical, however, as does the pensions industry, which cites several
"Compulsion should be the last
resort after all other options have been exhausted," says Stewart
Ritchie of Aegon, who maintains that one of the biggest problems with
compulsion is that it might not actually increase savings.
Since compulsion was introduced in
Australia in 1992, overall savings have actually fallen, he says. Saving
as a proportion of income per Australian household has dropped from 15 per
cent in the 1970s to between 1 and 2 per cent.
But Donald Duval of Aon, who was the
government actuary for Australia between 1991 and 1996, takes issue with
what he describes as an over-simplified reading of the data.
"All kinds of things drive changes
to the savings ratio," he says. "It may well have dropped
dramatically anyway. We can't measure the impact of the introduction of
compulsory pension contributions because we don't know where the saving
ratio would have been otherwise."
Duval is adamant that the Australian
experiment has been a success, although he is acutely aware that it could
never be introduced in the same way in the UK.
"A significant slice of the
population, perhaps a third, had no savings or assets other than a trivial
amount of cash in the bank and a mortgage," he says. "These
people now have sizeable pension savings. There is no question that, on an
individual basis, they're considerably better off, whatever savings ratios
may show in aggregate."
Compulsion was pushed through in
Australia by trade union power that no longer exists in the UK. That is to
say, the unions controlled collective wage bargaining. Compulsion became
affordable after employees agreed to forego a three per cent wage increase
in return for compulsory contributions by employers of 3 per cent of their
This proportion has risen over the
years to nine per cent. Even today, employees make no contributions per
se, although they are effectively doing so through wage sacrifice.
Another feature of the Australian model
is that retirees can take the whole of their pension fund in cash. There
is some evidence, however, that the prospect of such a big windfall on the
horizon has simply encouraged greater debt, as those approaching their
final pay packet borrow against the forthcoming nest egg.
David Willetts, the shadow pensions
secretary, says: "If we make people save more towards their pensions,
we can't be certain they won't borrow to do so. If this happens, people
will be no better off."
There are also concerns that a minimum
employer contribution would have to be set at a fairly low level to avoid
crippling industry. This could even encourage the more generous companies
to cut back on what they are already paying into employees' retirement
Another concern is that tax relief on
contributions may disappear if pension savings becomes compulsory. After
all, why bother to incentivise people to save when they are compelled to
do so anyway?
Which brings us back to the political
risk, about which Darling was almost certainly right. Readers of the Sun
rather than those living in Middle England could become the greatest
threat to the Government's election chances. Broadly speaking, the
better-off half of the population is paying into a pension already, and
the bottom 10 per cent would be exempt.
This leaves about four in 10 workers
having to give up perhaps £5 in every £100 of earnings from their wage
Ritchie argues: "The battleground
will centre on those earning between £12,000 and £30,000, where
significant numbers will feel that, while they're paying off student
loans, trying to buy a home and raising children, they simply can't afford
to save for their retirement as well. Their biggest priority is likely to
be getting out of debt."
Significantly, Adair Turner, who chairs
the pensions commission, has expressed doubts about whether the pensions
gap could ever be closed simply by increasing savings by whatever means.
Turner told a recent gathering at the Institute of Actuaries: "My tentative conclusion is that [the forecast] increase in the percentage of wealth devoted to pensioners will not occur . . . [with] unchanged retirement ages. So that what will have to change above all is the average retirement age."