BeeHive > BeeLines > Soft Compulsion
Soft Compulsion
I am more convinced than ever that all this fuss about our so-called national pensions debate, which includes the two years of work put in by the Pensions Commission, will all boil down to nothing more than some polishing up of the Basic State Pension and employers being allowed to put new employees into their pension schemes automatically. I’ve thought this for some time now, but following the announcements by the Department for Work and Pensions (DWP) earlier this week I’m pretty much convinced of it. Indeed, by the time the Pensions Commission’s report finally comes out at the end of November I’m beginning to suspect we won’t really need it.
The Basic State Pension (BSP) is a problem because so many women in the UK don’t receive the full entitlement as they find it difficult to fulfil the contribution requirements. This means that in addition to the unfairness of the Pension Credit system, which taxes the pension savings of some by 40%, many women will also face an even more unfair penalty when they will have to ‘repair’ their inadequate BSP entitlement and suffer an effective tax of 100% on their pension savings. So, for people in general who are in the frame for means-tested support in retirement through the Pension Credit system things are bad enough, but for women in that position things are generally much worse. The problem is the Pension Credit system assumes that everyone applying for it is already entitled to a full Basic State Pension, which many are not. This means that pensions for millions of people in the current UK workforce are simply not suitable investments when compared to other things people can do with their money and that is more true for women than it is for men. Obviously this state of affairs needs fixing.
A press release put out by the DWP on 12th July seems to indicate that the Government has finally latched onto the problem. About time too, in my opinion, as we and others in the industry have been banging on about it for ages now and it’s years since I gave evidence to both the Commons Select Committee and the Lords’ Economic Affairs Committee on just this point. But better late than never I guess. Perhaps it was just too difficult a message for Government to take on in those days, but now it’s not? The press release quotes David Blunkett, the current pensions Head Honcho, as saying “…I readily accept that inequalities in the current system are a serious issue, which is why I believe we need to highlight it in the current National Pensions Debate and give it the individual focus it deserves. … I can announce that we will soon be hosting an event to look specifically at how we can make the pensions system work better for women.”
Fixing the problem so that everyone has a better shot at getting full entitlement to the Basic State Pension of course, won’t come cheap. It’ll need some serious money thrown at it. The odds are that that money is most likely to come from canning the State Second Pension (S2P, the pension scheme formerly known as SERPS) and the rebates that are paid to the millions who are contracted-out of it. That would make the individual decisions on contracting-out a bit easier I suppose, but it would probably also have the knock-on effect of killing final-salary pension schemes stone dead. It’s a tricky one.
It’s interesting, though, that in the same press release the DWP decided to announce new guidelines for employers who they say are unsure whether they can use automatic enrolment techniques if they are running Grouped Personal Pension (GPP) schemes or Grouped Stakeholder Pension (GSHP) schemes. This too is a difficult subject as these types of schemes are different to occupational pension schemes, where automatic enrolment is becoming more common, mainly because of the very different regulatory requirements that apply when individual contracts are distributed to people.
David Blunkett is quoted on this as saying "We decided to issue these guidelines following discussions with industry and employers who said they were unsure if they could use 'opt-out' in workplace personal pension schemes under the law as it currently stands. Employees will be able to 'opt-out' of the scheme if they prefer, whether to make alternative provision or otherwise.
"Research has shown that where employers use an 'opt-out' approach, membership of the company pension scheme can go up by nearly 30%. The new guidelines show companies how they can use 'opt-out' if appropriate to help more of their employees to make the most of available pension provision. I would urge them to consider whether this approach is suitable for their arrangements, and of benefit to their members."
Automatic enrolment of new employees into a company pension arrangement, with those not wishing to join needing to opt-out, is something that many are now referring to as ‘soft compulsion’.
Along with the press release the DWP has also issued a booklet entitled ‘Automatic enrolment in workplace pension schemes – Guidance on the regulatory framework’. The title is a bit misleading as the guidance only applies to GPPs and GSHPs and only where employers are contributing towards the costs of their employees pensions. What these guidance notes do is to draw out the very fine line employers and advisers will need to tread if they are to introduce soft compulsion to personal pension based workplace pension schemes. I don’t want to rewrite the guidance notes here, but I really do think all advisers involved in putting GPPs and GSHPs in place for employers and their employees should read the guidance carefully. Employers would do well to read this stuff too, it’s very important. You can get a downloadable version of the booklet by clicking on the following link:
This form of compulsion, of course, won’t do much to help us spread pension schemes to companies that don’t have them, or to fill up the hundreds of thousands of empty stakeholder ‘shell’ schemes where employers make no contributions, but it will probably increase the take-up of pensions in companies that already run good schemes for their employees. It’s not the grand vision of ‘compulsion for all’ that the national press gets so excited about, but that’s something that I don’t think was ever really on the cards anyway. The idea that the *12 million people in the UK workforce with no pension savings could afford to have thousands of pounds a year diverted from their pockets into enforced pension savings has always seemed a bit daft to me, particularly as there is so much personal debt around these days. I guess if it ever did happen it would have a drastic effect on our national shopping habits and the economy would probably fall through the floor as a result. It seems unlikely that would be regarded as a good outcome by anyone…..
15 July 2005
Source: DWP Press release, 12 July 2005 - Women's pensions to be key focus in national debate - Blunkett
*Pensions Commission's Report, Pensions Challenges and Choices The First Report of the Pensions
Commission published 12 October 2004
Any research and analysis included has been provided by us for our own purposes and the results of it are being made available only incidentally.
