BEE Side - A fair question
The so-called pension crisis we face in the UK is not a straightforward problem that can be easily solved. The Labour Government set up the Pensions Commission under the chairmanship of Adair Turner to come up with proposals for ways in which the long term problems caused by millions of Britons not saving for the longer term could be tackled. Nevertheless, there has been much talk of the seemingly simple solution of imposing compulsory pension savings that many see as the only way forward.
The Labour Party itself seems divided on this issue. At last year's party conference delegates voted overwhelmingly in favour of compulsion, but I doubt many of them really understood the question they thought they were answering. More recently, in the run-up to this year's General Election Tony Blair said in a press conference that he had ruled out pension compulsion as an option. But his Minister of State for Work and Pensions, Alan Johnson, said on television just hours later that it wasn't ruled out as party policy.
The Pensions Commission report put a lot of what we already knew about the UK pensions environment into sharp focus. The report highlighted the fact that a little under half of the workforce is well served by our voluntary pension system, but that that system completely fails the other 14 million who are likely to be completely reliant on state handouts in old age. Our voluntary pension savings in the UK, according to the report, amount to around £1.3tn, but the irony is this vast amount of money isn't 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? It's in the answer to this latter question that the easy option seems to be "let's make it compulsory".
It's at this point, I think, that common sense goes off at right angles to clear thinking, and it's all because of the compulsion word.
Let's use me as an example. I am in a pretty good occupational pension scheme that my employer pays something like 20 percent of payroll into every year. It's a final-salary scheme. I also have some fairly valuable pension rights from previous pension schemes I've been in. The question I'd ask is would I be forced to save more if we opt for compulsion? If the answer to that were yes, then it'd be crazy. I don't need any more pension savings and anyway, if I did, I'd rather sort it out for myself. The same applies to about half of the UK workforce - those who own the £1.3tn 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 - 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. It's 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. I'm 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 we'd 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 can't believe anyone, particularly a member of a socialist political party, would ever think that would be a good idea. I'd hope not anyway. And that's why I didn't really think the delegates at last year's Labour Party conference heard the question properly before they voted on compulsion.
But maybe if that isn't 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 wouldn't be selective and would neatly avoid all the awkward political issues attached to picking on society's 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? We'd be forced to save anyway, so why be nice to us about it?
If that's what compulsion means, then I'd be against it. It would be a sad ending for the most successful voluntary pension system in Europe, for a start. In that way we'd 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 wouldn't just be unfortunate, it'd be crazy. Compulsion, though, could simply be applied to employers. That's what many are now saying. It's a compelling thought isn't it? Make employers pay into pensions for everyone and - Bingo! - we'll have solved the pension crisis at a stroke. Well, I don't 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 there'd 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 Iimited 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 percent 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 that's what compulsion means then I'm all for it.
But that's really the point isn't it? Before we can say whether we're for or against compulsion we need to know what people mean when they ask us. I think they could mean anyone of the following four things:
- "Are you in favour of taxing poor people because they are poor?"
- "Are you in favour of losing the existing tax-reliefs on pension savings?"
- "Are you in favour of employers being taxed because they employ people?"
- "Are 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?"
These questions have the advantage over the question "are you in favour of compulsion?" 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.
First published in The Life & Investment Insider, May 2005