The problems with compulsion
I’ve been interested to read the various opinions that have all seen the light in recent weeks in advance of the so-called ‘Meeting of Experts’ that the Pensions Commission arranged for this week (Tuesday 21st June). The debate seems to have polarised around the ‘should we?/shouldn’t we?’ question on compulsory pension savings. Which I guess is exactly what we all thought it would do anyway.
The ABI published its views at the end of last week and, as it did not call for compulsion, it drew an almost immediate response from the consumer magazine ‘Which?’.
Reacting to the ABI’s report on pensions, ‘Which?’ said it had failed to call for the compulsory employee and employer contributions that ‘Which?’ believes are an essential component of the UK’s future pensions strategy.
Doug Taylor, campaigns team leader, ‘Which?’, said:
"It’s time for straight talking and straight truths. We need to stop tip-toeing around this issue. We urge the Pensions Commission to be brave, to be bold and to grasp the nettle of compulsion now. Our research has shown that compulsion is not the political suicide assumed by many; over 70 per cent of consumers are in favour.
"We also need to remove people’s fear in dealing with the discredited pensions industry; people need to feel a sense of security when taking steps to increase their personal pension provision."*
So it’s pretty clear where ‘Which?’ stands on the compulsion issue I guess, but other bodies hold other views. Indeed a survey by the British Chambers of Commerce (BCC) has found that one in five firms would lay-off staff if they were forced to pay into pensions for their employees.
The BCC’s survey of over 800 businesses also found that more than one-third of employers would be forced to meet the cost of compulsory contributions by freezing salary increases, while just under a third would have to pass the cost onto customers by raising prices.
Commenting on the survey findings, BCC Director General, David Frost, said: "These findings show that forcing employers to contribute towards pensions would come at a high price both for businesses and their employees. Compelling employers to pay into pension schemes would simply increase the cost of employing someone and it is clear that some firms would be forced to reduce the size of their workforce to meet this cost. At a time when our companies are facing fierce competition from countries such as India and China, compulsory pension contributions are the last thing that UK employers need."
The BCC’s survey shows that many businesses already find pension provision to be cost prohibitive. More than half of firms that do not offer a pension contribution for their staff say the major reason for this is that they cannot afford to do so, with three-quarters of these companies employing less than 50 people.
Mr Frost continued: "When it comes to pensions, cost is a real issue for many firms, particularly small and medium-sized businesses (SMEs). We will continue to press the Government to introduce some form of additional financial incentive to encourage and enable small businesses to provide pension contributions. Indeed, more than half of firms that do not currently offer a contribution say that such a move could persuade them to do so."
The BCC is calling on the Government to do more to encourage and enable individuals to take greater responsibility for saving towards their retirement. The BCC’s survey found that 55% of schemes that offer an employer contribution of between 5% and 10% have failed to attract more than half of the workforce as members. In addition, one-third of employers that do not offer a pension contribution say the reason for this is that their employees would prefer other benefits such as higher salaries.
Mr Frost said: "The failure of individuals to save is undoubtedly due to a range of factors. However, we now need to see real measures to encourage more people to pay into pensions. This means better government-led information for employees about the benefits of pension saving, greater use of automatic enrolment in company pension schemes and a simpler state pension system that complements individual saving rather than discourages it."**
So, that’s two sides of the argument, that of a consumer body and that of an employer body, but I suppose the other viewpoint we shouldn’t overlook is that of individuals themselves and the way they would be likely to react if forced to make compulsory pension savings. At the moment around 12 million people out of the UK workforce are not saving for retirement or not saving enough. Those who do save, the 10 or 11 million with company or personal pensions, paid around £29 billion into their pension schemes last year and in total so far have £1,300 billion in pension assets between them. It seems to me that if those with no pension savings were compelled to save billions of pounds every year, year in and year out, it would have an enormous impact on the average amount of disposable wealth kicking around in our economy. I mean, the papers last month were full of scare stories about a 1 or 2% shift in consumer spending habits and how serious that could be for the UK high street if it continued. If it’s so bad that people taking a few weeks off shopping could bring our whole economy crashing down, what effect would compulsory savings of billions a year being diverted from our wallets and purses have? We’re not exactly in a position to simply borrow more to make up the difference are we? We already have record borrowings of over £1,000 billion to pay back as it is. And that’s something else the Government’s got to be worried about too.
I don’t know how all this stuff will come out in the end, but I’d be amazed if anyone is really serious about compulsion. It just looks like the wrong thing to do, even if it does seem a neat way to get people saving without too much effort. I’ll be writing more about this over the next few weeks.
22 June 2005
* Source - Which Press Release dated 16 June 2005
**Source - BCC News Release dated 17 June 2005
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