Iíve seen plenty of comment in the press over the last few weeks tackling the question of whether we should turn to pension compulsion as a way of solving the so-called pension crisis we are now facing. Most of the interest in compulsion has been stimulated by the recent interim report from Adair Turnerís Pensions Commission as you would expect I suppose, but I keep reading the articles and wondering just what people actually think theyíre writing about.
There have been various polls conducted that say certain groups are either for or against compulsion, and there was even a vote by the delegates of the Labour Party at their recent conference where they voted overwhelmingly in favour of compulsion. I just wonder what exactly it was that they thought they were voting for, just as I wonder what the various people polled on the subject thought they were being asked for their opinion on.
If you were to ask me whether I am in favour of compulsion or not Iíd probably have to say I donít know as it depends entirely on what you think youíre asking me. I am in favour of what some people might call compulsion, but completely against what some others might call compulsion. So I probably know too much about the subject to be able to answer. In my view these polls and surveys that are being reported all over the place at the moment are worthless if neither the questioners nor those questioned know what the other person is talking about. Itís a language thing I guess.
Let me explain a bit more about what I mean and see if I can get you to agree with me.
The Pensions Commission report put a lot of what we already knew about the UK pensions environment into sharp focus. Maybe that wasnít so necessary for those of us in the industry, but it certainly put the cat among the pigeons as far as Joe and Josephine Average are concerned, and that includes most politicians too. The high level of media comment has been a reflection of the shock that many felt on finding out some of this stuff for the first time. In a nutshell the report has highlighted the fact that half the workforce is well served by our voluntary pension system, but the other half look like theyíre up the creek in the long term either with or without the means-testing paddle.
Our voluntary pension savings in the UK, according to the report, amount to around £1,300 billion, or to put that another way, a small fortune. If you add together all the pension savings for all the other twenty-four European countries we have more than the lot of them. Thatís pretty good Iíd say, but the problem is this vast amount of money isnít put aside for the pensions of all of us. It just belongs to half of us.
This is the problem the Government faces. Is it possible to extend the savings culture to the half of the workforce that is completely dependent on the State for its retirement income? More importantly, and the reason they set up the Pensions Commission in the first place, how do they go about getting people to save? Itís in the answer to this latter question that the easy answer seems to be ďletís make it compulsoryĒ, or something along those lines.
Itís at this point, I think, that common sense goes off at right angles to clear thinking, and itís all because of the compulsion word.
Letís use me as an example. I am in a pretty good occupational pension scheme that my employer shoves something like 20% of payroll into every year. Itís a final-salary scheme. I also have some fairly valuable pension rights in the bag from previous pension schemes Iíve been in. The question Iíd ask is would I be forced to save more if we go for compulsion? If the answer to that were yes, then itíd be crazy. I donít need any more pension savings and anyway, if I did, Iíd rather sort it out for myself. The same applies to about half of the UK workforce - those who own the £1,300 billion in pension funds between them. On the other hand, if the answer is no, then I suppose the compulsion being talked about would be some kind of selective compulsion. We would only be compelling some people to save, not everybody Ė not me, for instance.
Selective compulsion is a worry as it implies we will end up defining who should be compelled to save and who should not. Itís not too much of a stretch of the imagination to get to the point where the group defined would be those who are not saving enough at the moment to float themselves off of means-tested handouts in retirement. Or to put that in plain English, the poorer people in our society. Iím sure many people would think that it would be ideal if we could get that group to save, as it would solve the problem for us all in the long term. But, turning that on its head a bit, what weíd really be saying is that we would be in favour of forcing people to save up to provide themselves with a pension to save the rest of us funding means-tested benefits for them in later life. It would effectively be a tax upon poor people, just because they are poor. I really canít believe anyone, particularly a member of a socialist political party, would ever think that would be a good idea. Iíd hope not anyway.
But maybe if that isnít what compulsion means it might mean that all of us should be forced to save, including those of us who already are. The Government could simply make it compulsory for me to save in exactly the way I already am. That wouldnít be selective and would neatly avoid all the awkward political issues attached to picking on societyís poor. But if people like me, and all the millions of others who are in good pension schemes already, are going to be forced to save, why should we be offered tax relief for doing so? The tax reliefs we get at the moment are there as an inducement to get us to save in a voluntary system. If it were no longer voluntary to save, why would we need any inducements? I mean, weíd be forced to save anyway, so why be nice to us about it?
If thatís what compulsion means, then Iíd be dead against it. It would be a sad ending for the most successful voluntary pension system in Europe, for a start. In that way weíd be going completely against the European trend, where nearly everyone else is trying to put a system of voluntary pension savings in place. As an outcome that wouldnít just be unfortunate, itíd be crazy.
Compulsion, though, could simply be applied to employers. Thatís what many are now saying. Itís a compelling thought isnít it? Make employers pay into pensions for everyone and - Bingo! - weíll have solved the pension crisis at a stroke. Well, I donít know. I think the days are long gone where Governments regarded employers as some kind of source of extra capital from outside of the economy. No-one thinks money comes out of the ether any more. Employer compulsion would look just what it would be - nothing other than a tax on employers. Quite apart from anything else I should think all hell would break loose if any Government tried to push employer compulsion through, and thereíd be plenty of scope for all sorts of unintended consequences to come into play.
Where will all this end up though? Perhaps compulsion will just come to mean some form of limited compulsion, maybe through the existing National Insurance system? Such compulsion could be aimed at providing a universal old-age pension as a right for all citizens. It could be a bit like the Basic State Pension was back in the 1960s, but without the highly complex, and largely pointless, contributory system getting in the way. Perhaps a more redistributive and socially acceptable tax on all of us if you like. I think that could work.
Back in 1965 our old-age pension, for a full lifetime contributor, worked out at around 20% of average earnings. The pension was also linked to increases in the general level of earnings in those days too, so it kept its value. Today the Basic State Pension falls well below that level and it only increases in value in line with price increases, not earnings levels.
Perhaps if we did away with the overly complicated state second earnings-related pension system and just went back to the old idea of a decent old-age pension, but for everyone, we would have an answer to our pension problems going forward. A good subsistence level pension for all would do away with the need for means-testing and would make it possible for pension saving to be spread to millions more in the workforce as every pound saved would make savers at least one pound better off in retirement than non-savers. This could be paid for perhaps with more compulsion on us to pay extra National Insurance contributions. If thatís what compulsion means then Iím all for it.
But thatís really the point isnít it? Before we can say whether weíre for or against compulsion we need to know what people mean when they ask us. I think they could mean either one of the following four things:
- ďAre you in favour of taxing poor people because they are poor?Ē
- ďAre you in favour of losing the existing tax-reliefs on pension savings?Ē
- ďAre you in favour of employers being taxed because they employ people?Ē
- ďAre you in favour of everyone in society getting a subsistence level of pension when they retire, thus doing away with means-testing and making voluntary pension saving, with tax incentives, worthwhile for all?
ĒThese questions have the advantage over the question ďare you in favour of compulsion?Ē in that they are easy for people to understand. The answers to these questions would, therefore, seem to me to be more useful than the answer to any question with the word compulsion in it. Or am I missing something?
27 October 2004
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