We should all be forced to pay into a pension scheme, just like we pay tax. That is according to the latest damning report into the state of pensions and retirement saving by think tank Policy Exchange.
The report, published on Wednesday, said 11 million people risk ‘pensioner poverty’ unless the government makes it compulsory for employees to pay into a pension.
Policy Exchange backed-up its bold suggestion with figures, saying someone earning the average wage (£27,000) will need to save over six-and-a-half times more than they currently do to generate the government’s recommended retirement income of £16,200. It said the average pension pot is estimated to be just £36,800, which on current annuity rates is enough to generate a retirement income of a mere £1,340.
This could be seen as just another scaremongering report into the dangerous state of retirement savings, but it has actually put forward an interesting, yet controversial, proposal to address this shortfall. This is in the shape of a ‘Help to Save’ scheme which, the think tank said, would make it obligatory for people to save for their retirement “equivalent to paying taxes for public services”. The idea would be for paying into a pension each month to become just like paying tax or national insurance (NI).
We all moan upon reading our payslips each month about the significant chunk that deductions make up, whether it’s tax, NI, student loans, cycle to work schemes and other salary sacrifice benefits. It may be glaringly obvious in black and white on that piece of paper that hard-earned money has been deducted, but the thought is usually short-lived and is ‘just what happens’ when you venture out into the big, wide world. So it is not entirely unfeasible to one day see a ‘pension’ section added under ‘deductions’ and particularly if it is on a salary sacrifice basis it would be an easy way to facilitate better retirement saving and the institutional investment market and so on.
However, needless to say, it’s unlikely these measures would go down well with the general public – I think the obligatory part would become a bone of contention. Why would a 22-year-old fresh out of university, burdened with a student loan, paying rent and then having enough left over for a few indulgences, want to see less in their take-home pay?
Plus, just over a year on it seems too early to judge whether the Turner proposals and the resulting auto-enrolment (AE) regime has been successful in facilitating more retirement saving or not. So far only one-in-10 employees have opted out of AE schemes and if that rate continues it would not only show the power of inertia and behavioural finance, but also see AE deemed a success from an operational perspective.
But, AE has to also be successful from a savings perspective and relying on the power of inertia alone is a big gamble and that is where the Policy Exchange report hits on a couple of important points: increasing contribution levels and implementing auto-escalation (where a proportion of any increase in pay has to be allocated to a pension contribution). It is right to highlight the current low 8% minimum contribution and aim for 12%; and auto-escalation is another tool which increases contributions but without an employee really noticing a difference in take-home pay. Both things that adjustments to the current AE legislation could make happen.
The true test will be once AE has hit all companies and even then it will take some time to be able to judge its success. I am beginning to think compulsion could be the way forward because state pension is inadequate (despite NI contributions) and relying on individuals to do it themselves is asking too much, but let’s give auto-enrolment – perhaps with a bit of tinkering – more time before insisting on compulsion.
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