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10 per cent employer contributions needed to close savings gap, says consultant

Employers need to pay between 9 and 10 per cent into pensions schemes on top of employee contributions to close Britain’s £27 billion savings gap, says financial services consultant Mercer Oliver Wyman.

The firm says NPSS proposals for a 3 per cent employer contribution backed up by 1 per cent tax relief and a 4 per cent employee contribution are hopeless insuficient.

Director Andrew Rear says: “NPSS has not been well thought through. The proposed 3 contribution level from employers will be ineffective in closing the Savings Gap. Yet there has been no debate about how high the contribution rate would need to be raised, nor on the impact that would have on British competitiveness.”

“Our analysis”, continues Rear, “considers not only the amount of money that would be saved in NPSS, but also the impact on other savings. Unfortunately evidence from other countries shows that a compulsory pension scheme has two unintended effects on consumer behaviour: it causes consumers to reduce other savings so that there is little net new saving; and it creates a false sense of security that the compulsory savings are sufficient, thereby making it more difficult for advisers to persuade customers to save adequately for their retirement.

Therefore the contribution level currently proposed can never be the final settlement if the Government is serious about closing the Savings Gap”.

He points out that in Australia, where compulsion was introduced in 1992 at the 3 per cent level, the savings ratio actually fell. Analysis by Gallagher and others showed the harmful effect that compulsion was having on savings of lower- to middle-income households. Consequently the rate of employer contributions was tripled over the next 10 years to 9 per cent. Analysis for the UK suggests that at least this level of employer contribution would be required, in addition to the 4 per cent employee contribution and 1 per cent from tax relief.

Rear says: “Perhaps the Government does have a much higher eventual employer contribution rate in mind. But if that is the case then we need to be debating it now, not when NPSS is implemented and failing. British industry operates in a highly competitive world market, and it may be that a higher compulsory contribution rate would simply be unpalatable, and Britons would be left with a halfway-house scheme that would not in any way improve their prospects for a comfortable retirement.”

“Ultimately NPSS could prove to be harmful to consumers. By distorting the market for private savings, one of the largest and most competitive in the world, and replacing lost savings with an ineffective compulsory scheme, NPSS may turn an imperfect system with a worse one”.

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