Not many people have yet signed up to stakeholder pensions and many of
those who have will be too young to write.
It is proving to be a tax-efficient savings vehicle for the wealthy. Not
quite what the Government had in mind. But it still has the potential to be
the product around which our salvation from poverty in old age can be
For this to happen, though, the Government will have to bite the bullet of
compulsion. This will have to come sooner rather than later as,
eventually, the political implications of tax increases to support the
elderly or the social effects of poverty will seem even worse than
The reason why compulsion is the only way is that no amount of education
or tax incentive will make the majority of young people invest as much in
their future as they should at the time when it has the greatest
opportunity for growth. Apart from a few anoraks, most young people are
rightly more interested in sex, drugs and rock and roll.
So, instead of trying to convince them, which will fail, they will have to
be compelled, which will succeed. The trick is to compel them without
causing them to stop voting for you in even greater numbers than at present.
There is a way. It has never been thought of before. Probably because it
is so simple.
The current workforce is being asked to pay for the pensions of our
predecessors and to provide our own, too. If it works, the next generation
will then only have to pay for their own pensions. If this takes full
effect, the tax burden will reduce.
So, the answer is to spread the cost of paying for our pensions across
several generations and to defer some tax reductions in the future as a
longer-term project works its way through. This will work because people
will not miss what they have never had (lower taxes).
In practice, this means that the Government would borrow money today (not
raise taxes) to make modest contributions on behalf of every worker to
their own choice of stakeholder pension. The level of contribution would be
calculated as sufficient to provide a 21year-old with a pension big enough
to keep them off inc-ome support at 65. Individuals and employers would be
all-owed to top this up with the current types of tax incentives.
Over the next 45 years, Government spending requirements would fall as the
proportion of fully funded people reached 65. But these savings would be
applied to repaying the debt accumulated in the early years. Eventually,
all the debt would be repaid and taxes reduced permanently thanks to the
state effectively funding pensions at the start rather than at the end.
So, the Government will give individuals a “free” stakeholder pension.
This might actually make them more popular. Once they have their own
account, they will be more likely to take an interest and to invest more
money earlier than they might otherwise have done. There is a drawback. The
Government would have to accept that it was going to borrow a massive
amount of money over a very long period but it would be able to see how and
when the money would be repaid.
At the moment, society seems to be opting for telling people that they
face poverty if they do not make their own provision. Although scaring
people helps, it is not the answer because people tend to be easier to
scare once they get a bit older. I know this.
What we would really need to do is to scare them sufficiently in their
early 20s but this is just not realistic in most cases. Compulsion is
therefore the only answer.
This solution spreads the costs of the transformation to universal funded
pensions across the generations that will benefit from the change. In doing
so, it enables the transformation to happen without any generation of
taxpayers regarding the solution as a burden on them.
Daniel Godfrey is director general of the AITC