31st May 2013
The British are currently being offered – with varying degrees of enthusiasm – referenda on the European Union and the UK’s future relationship with it. We have also recently seen a referendum offering a change in the voting system and turned it down.
But should something similar, at some future date, be applied to pensions asks John Lappin?
The UK is in the midst of introducing a pension auto-enrolment system – larger employers have already introduced it. The system is one where you are enrolled unless you specify that you don’t want to join. If you do join, your employer must also pay in contributions. The minimum level is 4% for you, 3% for your employer with 1% from the Government viatax relief. We have already written at length on Mindful Money about why this 8% probably is not adequate for your retirement.
But that is not what we are going to talk about here. The alternative name for the system is soft compulsion. If you contribute, your employer has too. And the fact is that under this system, the Government is hoping that inertia keeps large numbers of the workforce paying into pensions, when previously, inertia kept large numbers away from pensions.
The fact that employees may not be paying much attention and may find themselves in a pension is arguably why the Government has worked itself into such as lather about pension charges and governance.
Many people now believe the Government will eventually make soft compulsion hard, meaning people would have to pay into a pension. There would be no opting out except for those on low salaries already excluded. But this is a huge political issue. Many say it would only happen when a party has a landslide majority in the House of Commons and the last time that happened, was 1997. With our political system now split into a three and arguably four party regime, before you take into account the UK nations outside England, it may not happen again.
Does that mean it may only happen if the big two, Labour and the Tories, reached a consensus – as indeed they did over the current system? It could happen but then again, it could also be a gift to UKIP.
So perhaps MPs will baulk at introducing compulsion particularly in a difficult economic climate. When full compulsion was introduced in Australia it was introduced during a boom. It was also introduced by a Labour government which was able to bring the trade unions on side. They were prepared to forego part of their salary increase to get the system up and running. That is certainly not the case in the UK.
But here are two big considerations to help concentrate minds. The first is that we could see a system of auto-enrolment which fails to sufficiently extend funded pension coverage. Even the current system for providing the state pension, is under pressure. If we still have a huge proportion of people without a private pension or relying somehow on their home, we may face a slow burning issue for taxpayers. That is, if the current reform does not succeed.
If it does succeed and dramatically increases the number investing in a pension what about those who opt-out? Outside of a minimum amount, will society want to continue to support them?
Both those scenarios and even a moderately successful reform will present politicians with an interesting dilemma. We wonder if they might at some stage in future decide to ask the public in a referendum – should people have to put away a percentage of their salary to help fund their retirement? It might make a controversial decision more palatable. It could even mean we are all in this together a little more.