LONDON - Britain's pension community was alive with speculation last week following reports that the government is considering the introduction of mandatory pension contributions.
The speculation arose after reports that the government was looking for ways to solve its retirement savings shortfall crisis and that Department of Finance officials had suggested mandatory contributions as an option. The furor follows the publication of a study by the Association of British Insurers that showed Britons had a L27 billion ($37.8 billion) deficit on what they wanted to spend in retirement and what they actually are saving.
As of now, however, it is all speculation. Prime Minister Tony Blair, who last week appointed Andrew Smith as the secretary for work and pensions following a cabinet reshuffling, refused to comment on the reports.
But pressure on the government to make pension saving mandatory could be increased in the next few weeks after the publication of a government-sponsored report by Alan Pickering, former chairman of the National Association of Pension Funds. Mr. Pickering is expected to recommend that employers require staff to join company pension plans as part of an overall attempt to simplify the U.K. pension system.
While many in the industry were positive on the idea of mandatory pension contributions, a number of sources said the current political environment would not allow the government to make such a radical change to pensions policy.
"Compulsion would be seen as an additional tax on companies ... or you'd be asking low-income-earning individuals to set aside a portion of badly needed income each week. It's quite hard to envisage low-income people, perhaps with the burden of student loans, having to pay their salary in retirement savings," said Stephen Yeo, pensions policy researcher for the opposition British Conservative Party.
Boon for managers
If introduced, a compulsory system would represent a major boon for institutional money managers, who would stand to manage the larger and faster-growing pool of assets.
The pace of growth under a mandatory contributions system would depend on the level at which the government set the required contributions rate, and upon which types of plans these affected.
The most likely way mandatory contributions would be introduced would be to require both employers and employees to contribute small percentages of salary to an approved fund. Members of defined benefit schemes most likely would be exempted.
The issue comes up at a time when the government is facing criticism over the succession of occupational scheme closures, cutbacks in the public pension system, and a lower-than-expected take-up of new private retirement initiatives such as the stakeholder pensions. Stakeholder pensions, a system of personal pension plans similar to individual retirement accounts in the United States, were introduced last year to bridge the gap for people who did not have occupational plans and did not qualify for the state pension.
Both the plan closures, the slow uptake of new pension initiatives and cutbacks to the state pensions are undermining the government's pensions policy of ensuring all individuals accumulate sufficient savings to sustain retirement.
"Occupational plans are closing, stakeholder pensions aren't being taken up and not by the target group they had in mind ... basically the government is worried that retirement savings won't pick up, and these rumors confirm they are looking to other options," said Steve Webb, pensions spokesman for the minority party Liberal Democrats.
The Association of Consulting Actuaries, London, reported fewer than four out of 10 defined benefit plans remain open to members. "And close to half of those that are still open are currently reviewing the situation," said Mike Arnold, chairman of the association.
Companies are finding the cost and risk of running defined benefit plans too high, and many are closing the schemes in favor of defined contribution plans, in which they contribute less money.
The new accounting standard, FRS 17, which will prevent plans from smoothing returns over several years, also is encouraging companies to drop defined benefit plans.
"It is an issue the government has to take seriously," said Joanne Seagers, a pensions policy researcher at the Association of British Insurers, London. "There is a savings gap between what people are saving and what they will actually need, and it definitely shows that people are not saving enough for retirement."
To date, the government has not seriously contemplated introducing compulsory contributions. Instead, it has focused on trying to encourage voluntary savings through incentives such as cash credits on retirement savings, the introduction of stakeholder pensions and supporting employers sponsoring occupational schemes with incentives.