Remember meForgot password?
    Log in with Twitter

article imageOp-Ed: Should personal pension contributions be made compulsory?

By Alan Cairns     May 21, 2014 in Business
London - The 'pension timebomb' narrative might be getting a bit old [sic], but the problem hasn't gone anywhere. If Osborne's saving-centric budget was intended to send a message, it's that the government can't afford to fund us into retirement.
The 'ageing population, pension timebomb' narrative might be getting a bit old [sic], but the problem hasn't gone anywhere. If Osborne's saving-centric budget was intended to send a message, it's that the government can't afford to fund us into retirement and we need to start putting more away.
Jared Wong (CC BY 2.0)
There have been suggestions that personal pension contributions should become compulsory. Libertarians are naturally hostile to the idea, but sometimes radical problems require radical solutions. Is this one of those times?
Why compulsory contributions?
Years of New Labour have given many Britons a case of state-intervention-fatigue. Forcing us to sacrifice valuable beer money today for some unknown tomorrow is unlikely to go down well with both generation, X, Y and millenials. And crucially, compulsory contributions have not (yet) been floated by the government.
But there's certainly a case to be made for it. As detailed in the government's October 2013 paper detailing the new single-tier pension, greater numbers of pensioners living for longer is leading to a projected rise in pensioner benefit spending from around 7% of GDP today to 9% in 2060 under the current, two-tier system, or 8.4% under the reforms.
Pensions currently make up 20% of the welfare bill, a proportion only set to grow. And even under the reforms, the state pension is only really enough for the minimum standard of living. The more people relying on the state pension alone, the more strain they're also probably putting on the NHS; making that 8.4% of GDP an incomplete spending estimate, and yet, as the government paper put it: “despite the fact we are living longer, fewer people are saving for their retirement”.
As it stands, the pension system is built on the premise of the working population paying for the retirement of the older generation. However, with a tax base progressively shrinking in proportion to the retirees it’s paying for, this spending increase is clearly unsustainable and the model is obviously outdated.
The only real way to avoid pensioner poverty is to encourage private pension saving. At the moment, the average pension pot is only £36,800. Meanwhile, estimates of how much you need on top of the state pension range from £160,000 (for an annual income of £10,000 - Just Retirement), and to around £340,000 (for £12,399 p/a – a “basic cost of living” - Fidelity).
The new auto-enrolment scheme is a laudable bid to nudge people in the right direction. However, think-tank Policy Exchange warns that only 8% of salary employees will be contributing once the scheme is fully functional isn't enough to raise these sorts of figures, recommending upping it to 12%. Moreover, the opt-out rate for the scheme is currently running at 9%-10%. Some people just don't want to save.
In short, we need to save more for retirement to provide for ourselves, but left to our own devices, we're not. Put this way compulsory contributions make complete sense.
Will it happen?
Forecasting might be a mug's game, but let's play.
We already know why it might happen, but could it? Given the scale of the problem, it's arguably inevitable, and the conditions have already been set. In a report entitled “Auto-Enrolment for UK Pension Schemes” by financial services research house Clear Path Analysis, they predict that if auto-enrolment opt-out rates become large enough, the opt-out may be removed in the Pensions Review coming up in 2017 – bringing compulsory contributions in.
In this scenario, auto-enrolment is a stepping stone to introducing compulsory contribution to a public wary of both long-term saving and government intervention. And there is precedent – Australia already operates a compulsory contribution scheme. Interpreting auto-enrolment as a deliberate move towards mandatory saving and warming up a hostile public is not that far-fetched. However, that could just be conspiratorial conjecture.
Alternatively, we could take the DWP at its word and assume there really is no intention to introduce mandatory contributions, and instead wring the best value out of the compromise, opt-out position. Mention has been made of introducing Dutch-style collective defined contribution schemes to maximise value.
For now, the second outcome seems more likely. The UK seems to become more libertarian by the day – and followers of conservative media certainly have an in-built distrust of the government on pensions ever since Gordon Brown's infamous raid. Introducing compulsory contributions would be a toxic political move that no short-termist government will want to make.
The removal of the annuity obligation in the latest budget demonstrates that the current government is certainly pursuing a more laissez-faire agenda. Under current rules, you don't have to buy an annuity if you can prove a viable retirement income without one. The new budget is scrapping that – a ringing endorsement of the 'you're responsible adults who can take care of yourselves' perspective; a position that negates the 'the state pension isn't enough so you must save in a personal pension' argument for mandatory saving.
So don't expect it in this parliament. But a more interventionist Labour government may feel forced into it.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
More about Pensions, Retirement, George osborne
More news from
Latest News
Top News