A STAKE IN THE FUTURE

The system is in place to transform the lives of future generations of older people, finally banishing poverty in old age. All that is required is the political will to press the button. Gordon Brown’s finger did not even hover over it in his April Budget.

I am talking about compulsory pension contributions. Not just for employees but for their bosses too. It is a simple concept. While you work, part of your wages or salary is not paid to you. Instead it is saved up in a pension fund. You and your boss both contribute to it. When you retire this pension fund is used to provide you with an income. Of course, many companies and just about all public authorities already operate such a scheme. Their employees, if they join it, can look forward to a more comfortable old age. But most companies, especially small ones, do not have a pension scheme at all.

Recent research done for the Association of British Insurers (ABI) found that to secure a decent income in retirement for everyone in work, we need to save a lot more – £27 billion a year more than we do at the moment. Of course, the ABI has an interest in encouraging us to save more – its members make their living by selling us financial products. But the work was done by international financial services consultancy Oliver, Wyman and the conclusions have to be taken seriously. The only group who are saving enough are people aged over 35 who are also earning more than £35,000 a year. The less people earn and the younger they are the less they save for their retirement. And, says Oliver, Wyman, the ‘savings gap’ could grow to £33 billion a year if the present trend of cutting back on company pensions continues (see pxx of this issue).

The Government wants to deal with this problem through the new stakeholder pensions which began in April 2001. Stakeholder are really no more than personal pensions invested in relatively safe stock market funds with very low costs. They were supposed to transform the savings habits of the next generation, ensuring that everyone put something away for their future. But their first year has been disappointing. Barely 750,000 people have started one and many of those that have are not in work – they are higher rate taxpayers taking advantage of the tax breaks to put money away for non-working spouses or even for children. Many of the people they were aimed at – lower paid workers who save nothing for their retirement – have not even heard of them, still less put money into one. Out of the total savings gap of £27 billion a year, stakeholders have closed it be less than £1 billion this year – and probably no more than half of that is from the people they were aimed at.

The result is particularly disappointing because since October 2001 employers without a pension scheme who have more than four employees have had to offer them ‘access’ to a stakeholder pension. In other words the employer has to find an appropriate scheme and, if requested by the employee, deduct contributions paid to the scheme from their wages. The ABI says that more than 90% of employers have now conformed to this requirement. But employees are still not taking advantage of the pension they offer.

One reason is that all the employer has to do is offer ‘access’ to the scheme. The employee does not have to join and the employer does not have to make any contribution towards the pension. The ABI says that where employers do contribute this has "a beneficial impact on take-up". That is hardly a surprise. If an employee puts £78 into a stakeholder, the Chancellor will chip in £22 in tax relief, so it costs £78 to get £100 saved up. But if the employer adds another £100 then it begins to seem really cheap money - £78 paid by the employee results in £200 going into a pension fund. Not joining that would be like turning down a pay rise. Unfortunately most employers do not see this as a useful way of spending their money. And, to be fair, most employees, especially the young and the lower paid, do not see putting money into a pension as a priority.

So should the Government force people to contribute to a pension? Already it makes employees and employers between them pay a total of more than 20% of wages into the National Insurance scheme. That pays state pensions to today’s pensioners but saves up nothing for the future. As the Chancellor showed in his April Budget, National Insurance is really income tax by another name – paying for today’s expenses of pensions and, now, the National Health Service. But although the Government has extended National Insurance it remains strongly resistant to extending the principle to force people to save up for the future. That is very short-sighted.

When Labour came to power in 1997 one of its first acts was to tax pension funds – taking away perhaps £5 billion a year from them. At the same time it gave back many billions of pounds to companies through reductions in corporation tax. Companies have not ploughed that money back into pensions. The big ones are cutting back on their contributions to pension schemes (see pxx) – most of the small ones make no contributions anyway.

A simple three point plan would change that.

· All employees to contribute at least 5% of their pay into a stakeholder pension plan.

· All employers to match the contributions made by their employees up to a maximum of 10% of pay.

· Basic rate tax relief from the Government on both parts to boost the total by 28%

That would help close the savings gap and eliminate poverty in old age. A year ago it would have been difficult to do. But now that every employee is obliged to offer a stakeholder pension, it would be a simple step to make them all contribute to the pension as well. The mechanism is there. It just needs the political courage to use it.

Summer 2002

e-mail Paul Lewis on paul@paullewis.co.uk