The Government's proposals to encourage all employees to join a company pension scheme look like the first steps towards compulsory pension saving for both employers and employees.
Like inertia selling, the proposal is that in future, unless an employee makes a positive decision to opt out of a company pension scheme, they will be automatically enrolled.
The hope is that apathy would rule and the vast majority would stay in company schemes and find themselves saving for retirement whether they wanted to or not.
However, this would not be a popular move unless at the same time the Government requires employers to make a contribution. At the moment, the majority of stakeholder schemes are “empty”, with no contributions from either employee or employer.
Most pension experts believe that compulsory saving is eventually the only way to ensure that the 10 million employees who currently have no private pension provision save for retirement but the Association of Consulting Actuaries has highlighted some obvious difficulties with this approach.
The danger is that any compulsion to force employers to make pension contributions could only be, initially, at a very low level if the extra cost is not to bankrupt some businesses. It is doubtful whether compulsory contributions of more than, say, 5 per cent of payroll would be acceptable and even at that level, some employers would be struggling.
But if the level of compulsory contributions is set at a low level, the likelihood is that this would become the norm and employers which currently contribute anything up to 15 per cent of payroll or more would simply reduce their contributions to bring them into line with the statutory minimum.
Far from producing better pensions for all, compulsion could mean worse pensions for many. The ACA believes this is a real problem. Commenting on the Government proposals, ACA chairman Gordon Pollock says: “The proposals also flag up the real possibility that employees will be required to contribute to a stakeholder scheme to which their employer does not contribute. There must be a concern that if this occurs, calls for minimum compulsory employer pension contributions may not be far away which might pull down the average level of employer contributions to that minimum, particularly if the employer offers a wide range of employee benefits other than a pension.”
Compulsory contributions could also backfire in a number of other ways, too. Clearly, the employer would be held responsible if something went wrong. How many employers might have chosen Equitable Life as their pension provider, with disastrous consequences for employees?
Who would be to blame if a low minimum compulsory pension contribution produces a derisory pension which still did not lift the individual above the level of the minimum income guarantee or, even worse, simply disqualified the individual from claiming free, non-contributory state benefits?
If the experts are correct and we are entering a decade or more of low interest rates and low investment returns, the cost of providing an adequate pension may simply be so expensive that it effectively becomes unaffordable.
The sums already look pretty horrific. The reason that half the population has no private pension provision is because they cannot afford to save. About 13 million taxpayers contribute only 10 per cent of income tax because their income is so low.
These individuals are already struggling and the cost of providing a pension which would lift them above the level of the Mig is simply unaffordable. Legal & General calculates that a 45-year-old would need to save £700 a month in order to provide a pension of two-thirds of the current average wage index-linked to account for inflation between now and retirement.
For someone earning £24,000 a year with take-home pay of about £1,400 a month, a contribution of £700 a month is already out of the question for anyone paying a mortgage and educating children.
There are no easy answers to the pension problem but something has to be done if we are to avoid an everdeclining standard of living for our pensioners.
The crunch will come fairly soon too as the post-war baby boomers are now coming up to retirement.