The Government has so far rejected introducing further compulsion into its pension policy. Instead, it has opted for the tactics of encouragement and incentive.
There are clearly doubts over whether the current strategy will be successful – stakeholder pensions are not being bought by the target group and the pensions credit will be too complex to act as an incentive to save.
New data from the ABI clearly shows that the take-up of stakeholder has been slow but it is too early to pass final judgement. It is not, however, too early to think about what an alternative strategy – greater compulsion – might mean. Compulsion rarely stays away from the debating table for long.
Let us clarify our starting point. We do, of course, already have a degree of compulsion. People who earn above the lower earnings limit have either to participate in the second tier of state pension provision (Serps – or state second pension as it is soon to be) or contract-out into another pension vehicle. It is important to remember the issue is whether people should be compelled to contribute to a second pension that is funded.
This change is frequently debated, not least because higher levels of compulsion exist and seems to work well in other countries. A good example is Australia.
The three pillars of the Australian pension system are the targeted age pension, compulsory superannuation and voluntary saving. In 1992, the government introduced the superannuation guarantee that compelled employers to contribute 3 per cent of earnings into individual accounts for all their employees.
This built on an accord between the unions and government made in 1986. The employer contribution is now 6 per cent and is set to rise to 9 per cent by 2002/03. There had been plans to introduce an employee contribution but the incoming Liberal government in 1996 shelved these proposals. The Australian system is generally regarded as working well but it does have its critics.
Some criticise the model of compulsory superannuation adopted, saying it is overly complex and highly regressive – benefiting the higher income earners most and being of little value to people on lower wages or not in paid work – for instance, because of caring responsibilities.
Others have more fundamental and philosophical objections to the very notion of extra compulsion, questioning what role the state has in telling people what to do with their income.
A more pragmatic angle on this is to say individuals know best their needs and how to meet them. Therefore, they should not be compelled to take a route that might not be best for them.
Lower-income households tend to prefer to invest in their future through interest-bearing accounts or buying a home. Through compulsory superannuation, people are essentially forced to risk their limited savings in assets which are less liquid and riskier than they might quite prudently choose themselves.
It has been suggested that the liquidity issue could be solved by allowing people to have limited access to pension funds before retirement. But it is the issue of increased risk which is more problematic.
Through the superannuation scheme, the government has compelled people to take on greater stockmarket risk and the victims of unlucky or incompetent fund managers have no recourse. A framework designed to give greater sec-urity in retirement may for many be doing the reverse.
The Australian Institute has recently suggested that its government should bide by one of their own key messages – mutual obligation. This term normally relates to welfare policy in which individuals are obliged to fulfil certain conditions before receiving state benefits.
The Australian Institute has asked whether the government has a mutual obligation to guarantee the safety of superannuation investments which Australians have been compelled to make from their wages and taxes. They suggest that the growth of superannuation has outstripped the capacity of the regulator to ensure it is safe.
In these circumstances, coerced contributors to superannuation funds might reasonably ask about the government's obligation to guarantee their private pension if their fund goes belly-up before they retire. The question is whether the greater compulsion means greater responsibility for government in ensuring security in retirement.
Another idea which has been mooted to help provide greater security for people is for funds to be required to divert a proportion of all compulsory contributions into a national savings and development fund. It is suggested that this would be administered by government appointees and guaranteed by the Govern-ment to provide a specified rate of return.
This issue is more pertinent in a system with greater compulsion but it already has resonance in the UK. If the Government did take the route of additional compulsion, then the issue of greater risk-taking cannot be ignored.
Frank Field and the pension reform group have recently set out their ideas for a universal protected pension. Their report had insights on the question of risk, raising the issue of political risk in addition to stockmarket risk.
Our current second pension system illustrates these two types of risks well – either stay in Serps (or S2P) and be at the whim of future Govern-ments or opt into a private pension and (if it is not a defined-benefit scheme) be at the whim of world markets.
The pension reform group's major concern was political risk. Reminding us of the cuts made by the Government to Serps in the 80s and 90s, it suggests increased compulsion but into a fund run by a part-elected, part-appointed body, removing it from the hands of politicians.
All this illustrates that greater compulsion is not str-aightforward and raises questions with no easy answers. If something is not working, it makes sense to change what you are doing or do what you are doing better.
Perhaps the Government has not exhausted its current strategy and simply needs to do what it is already doing better. This might mean more incentives, a simpler system and a better information and advice framework which allows people to make appropriate pension choices more easily.
If the Government does opt for an alternative strategy and decides to increase the level of compulsion, the key political issue might be when it could introduce the reform.
Australian superannuation was introduced at an opportune political moment. Compulsion was rejected in the UK in the build-up to the 1998 Pension Green Paper because ministers were concerned it would be seen as backdoor taxation. There might never be a better time than early in a second term of a landslide Labour Govern-ment. In public policy and politics, as with comedy, timing is everything.
Sue Regan is a senior research fellow at the Institute of Public Policy Research