I draw cartoon strips for some magazines each week; it keeps me sane (Ha! Ha!) The reason for mentioning it here is that one of the strips is about pensions (it's called Pension Conversations and is published in Pensions Week) and this week I’ve just put the finishing touches to it ready for sending to the printers; this week’s strip is entitled ‘Voluntary Compulsion’.
I’d like to build on the thoughts behind that topic in this BeeLine.
Drawing that cartoon has had the effect of making me keep thinking about the issue of auto-enrolment into pension saving that is being introduced through this latest set of pension reforms.
From 2012 all employers in the UK will eventually have to auto-enrol their eligible employees into a Qualifying Workplace Pension Scheme.
This is not something that employers will be able to ignore; they will be required by law to do so as it will be part of the ‘duty’ laid on employers by the 2008 Pensions Act.
Although employers will be compelled to auto-enrol their eligible employees into workplace pension schemes there is no compulsion on any employee to remain a member once auto-enrolled. Employees will retain the right to opt-out of the pension schemes, a process that some may have to undergo a number of times as the employers’ duty requires such opt-outs to be re-enrolled at three-yearly intervals.
If employees remain in the schemes once auto-enrolled their employers are required to eventually contribute a minimum annual amount of 3% of something called ‘Qualifying Earnings’. If, on the other hand, employees opt-out then their employers are obviously not required to contribute the 3% and neither are they able to pay such employees an extra 3% of salary to make up for the lost pension contribution. Such a payment would be deemed an inducement and employers must not induce employees to opt-out of Qualifying Workplace Pension Schemes. (Quite where such a rule leaves existing ‘flex-benefit’ schemes I don’t know, but that’s the subject for another blog I guess.)
Anyway, the punchline in the cartoon strip was that employees would only be compelled to save in a pension scheme if they wish to be compelled to do so; hence the term ‘voluntary compulsion’. I know it’s not a side-splitter, but I thought it was mildly amusing.
The workplace pension scheme that this new system will replace was called the State Second Pension. For decades now it has, in its various forms, provided earnings-related pensions in return for earnings-related National insurance Contributions levied on both employees and employers. The State Second Pension has always been compulsory; compulsory compulsion if you like. There was no way (other then by by being in contracted-out employment) that you could avoid paying the extra National Insurance Contributions.
I’ve been wondering how many people would have paid National Insurance Contributions towards the State Second Pension over the years if that system too had been based on voluntary compulsion. To put that another way, how many people would pay National Insurance Contributions if they didn’t have to? There was a brief foray into this sort of thing back in 1977 when married women were given the option of a lower-rate of contribution with a corresponding loss of benefit entitlement and plenty of them took it up...
30 October 2009
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