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Why are we afraid of compulsory pensions?

Why are we afraid of compulsory pensions?

At the National Association of Pension Funds (NAPF) annual conference 2012, the pensions minister was quite adamant that compulsory savings could cause “an awful lot of trouble” if introduced to the UK and therefore the uneasy compromise of auto-enrolment was preferable. The example of Australia was not one that the UK could follow. The primary reason the minister gave was that there would be political difficulties with compulsion because many people would perceive it as a new tax.

Politicians should be there to solve political difficulties. The future pensions of UK employees are far too important to be jeopardised because the government lacks the ability or will to get their message across to the workforce. In times past, politicians have had to face the public with far worse scenarios, even to the point of telling the public that they would have to send their young men and women off to war.

Without compulsion, the numbers saving will not be anywhere near as big as they could be. The auto-enrolment process is starting off with the very large employers who have big human resource departments that can sell the pensions idea to the staff and will probably be able to keep the number of opt-outs very low. Once it is the turn of the small and micro-employers (less than 5 employees), however, it will be a completely different story.

In a recession these employers are already stretched just trying to keep their business afloat. They will have neither the time to be concerned about the long-term future of their employees, when the short-term futures of their own businesses are so insecure. The opt-out level from these firms is going to be shockingly high.

The auto-enrolment process, with its complex rules about eligibility, enrolment and re-enrolment of the opt-outs, is a bureaucratic nightmare for small employers. It will have them praying for the simplicity of a Brussels directive.

That is why compulsion would have worked far better for employers. It is not a tax but in terms of arrangement, it works exactly the same way as standard NI contributions. This would be far simpler for employers and would not distract them from their business.

Compulsory pensions would have worked better for employees as they would not have been faced with a complex choice about saving but would have been forced to start saving for the future immediately. Compulsory pensions would have allowed a big bang approach, rather than the current 5½ year phasing in approach, permitting a more concentrated publicity campaign from the DWP to launch the whole project.

Even pension providers, including NEST, would have benefited because they would have got far more members in their schemes from the beginning, giving them greater opportunities for cost control.

The only group that compulsory pensions would have created difficulties for is the politicians, who would have had to work much harder to sell the concept. Guess whose interest ultimately triumphed?

Tom Murray

Twitter: @TomMurrayDublin

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