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 (BSP), and employers being allowed to put new employees into their pension schemes automatically.†
The BSP is a problem because so many women in the UK donít 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 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 July 12 seems to indicate that the government has finally latched onto the problem - better late than never. Fixing the problem so that everyone has a better shot at getting full entitlement to the BSP will need some serious money thrown at it. Chances are this money will come from canning the state second pension 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.
Itís interesting that in the same press release the DWP announced new guidelines for employers who they say are unsure whether they can use automatic enrolment techniques if they are running GPP schemes or group stakeholder 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.
The DWP has also issued a booklet entitled ĎAutomatic enrolment in workplace pension schemes - guidance on the regulatory frameworkí. The title is a bit misleading as the guidance only applies to GPPs and group stakeholders, and only where employers are contributing towards the costs of their employeesí pensions. These guidance notes 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 donít want to rewrite the guidance notes here, but I really do think all advisers involved in putting group schemes in place for employers and their employees should read them carefully. Employers would do well to read this stuff too, itís very important.
This form of compulsion, of course, wonít do much to help us spread pension schemes to companies that donít have them, or to fill up the hundreds of thousands of empty stakeholder 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.† Itís not the grand vision of Ďcompulsion for allí that the national press gets so excited about, but thatís something that I donít 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.
First published in Retirement Planner, August 2005