LONDON - A proposed compulsory pension scheme geared for lower-income and self-employed British workers is winning high marks for tackling a tough issue, but faces numerous obstacles in getting adopted.
Under the proposal from a committee of the National Association of Pension Funds, London, individuals not covered by employer-provided plans would be forced to contribute to a national scheme. Employees and employers would have to make minimal contributions of 5% of pay each, while the self-employed would be required to contribute at least 10% of pay.
The national scheme largely would supersede personal pensions, now the primary way for providing pensions for those without employer-provided schemes.
The concept has won support across the political spectrum. In addition, Frank Fields MP, who chairs the House of Commons' Social Security Committee, has issued his own proposal calling for compulsory pension coverage.
In making its proposal, the NAPF criticizes personal pensions as inappropriate for many and too costly, with commissions and fees running more than 20% of projected fund values.
Peter Murray, national pensions manager for Unilever PLC, London, who helped develop the proposal, said the new scheme could raise from (pounds) 5 billion to (pounds) 10 billion ($8 billion to $16 billion) a year in new savings. Another (pounds) 9 billion a year now stashed in personal pensions would be expected to shift into the scheme.
While impairing consumer spending in the short run, the new scheme would beef up the savings rate and bolster growth in the medium to long term, Mr. Murray said.
The NAPF proposal has won plaudits for tackling the difficult issue of how to provide retirement benefits to those not covered by employer-sponsored plans.
"The last seven years have proved to people who have an open mind that some form of compulsion is vital," said Nigel Preston, a partner with R. Watson & Sons, Reigate, referring to a government rule banning mandatory participation in employer-sponsored plans. The government seven years ago permitted employees to opt out of schemes and take out personal pensions instead.
"The average man in the street will not make pension provision," he added. Even if the average worker puts some money away, he "will not make adequate pension provision," Mr. Preston said.
But many pension experts, including Mr. Preston, doubt whether any political party would back a proposal that would impose additional taxes on workers and employers.
NAPF officials acknowledge the proposal faces tough sledding but say the alternatives are far worse. Sticking with the current pay-as-you-go system could result in huge payroll taxes, perhaps at 20% or 30% of income.
"The cost of keeping present pension promises could be a rise in taxes and social security contributions to unsustainable levels, leading to a taxpayers revolt and a search for alternative arrangements," the NAPF proposal warned.
Some approaches, such as cutting taxes or social security contributions, could be made to ease the transition, it suggested.
Mr. Murray emphasized the proposal is designed to get people to concentrate on the issues. Any details, he added, would be developed by government officials.
In addition, life insurance companies and financial planners are up in arms over the proposal's recommendation to restrict fees to low levels.
Others worry that any government-created minimum pension benefit will encourage companies that maintain pension plans to lower benefits to the minimum level.
In Australia, where mandatory pensions were started last year, there already are signs some employers are trimming benefits to the minimum level, said Paul Greenwood, research actuary with William M. Mercer Ltd., Chichester.
Alan Jenkinson, policy director at Sedgwick Noble Lowndes Ltd., Croydon, said the NAPF proposal attacked only part of retirees' income needs, as they pensioners also must cover potential health care and nursing home costs.
A special Retirement Income Inquiry established by the government last year to examine the future of retirement planning in the United Kingdom, to which the NAPF's research and planning committee submitted its proposal, will consider all of these issues, he said.
Many U.K. pension experts believe some form of compulsory scheme may be necessary, even if the NAPF proposal doesn't contain the exact formula. More than half of British adults are not covered by employer-provided retirement plans.
Previously, the NAPF proposed rejiggering benefits from the basic state pension, with low-income individuals receiving higher benefits, perhaps 20% of earnings, while better-paid individuals would receive nothing.
Under the new proposal, SERPS - the state earnings-related pension scheme - would be phased out and replaced with the national scheme. Workers younger than 50 would cease accruals under SERPS, although their benefits would be preserved and indexed for inflation. Individuals not covered by employer-provided plans would participate in the national scheme.
The target benefit would be set at 50% of career average earnings, revalued for inflation.
Contributions, set at 5% initially, would be adjusted every five years, and more frequently for workers older than 50. But contributions would never fall below 10% or rise above 20% of pay.
The state would standardize the benefits contract but assets would be managed by private providers, possibly consortia of major money managers and institutions with record keeping capabilities. Every five years, the government would award a franchise to one or more fund managers that bids the lowest fee.
The franchise managers would receive a huge advantage. While other managers also could market to employees, they couldn't charge any more than the franchise manager. Employees would be locked into their designated manager for five years. Accounts of workers who don't pick a manager would go to the franchise manager.
At age 60, an employee's account would be invested in index-linked gilts. At retirement, an annuity would be purchased, with the government picking a preferred provider as well as a panel of approved annuity providers.
The system is designed to keep fees low, in light of the high fees charged to holders of personal pensions. But bids to manage assets could come in below 0.2%, given the ability to offer indexed stock funds, the report said.
Mr. Murray said administrative costs would be in addition to the money management fee, and the government would not necessarily choose the lowest-cost provider but would consider issues of quality of investment services offered.
The proposal would "try to put caps on fees so more of the money goes into investments than on teams of salesmen," Mr. Murray said.