Mellon warns of dangers of pension compulsion

Compelling employers and staff to pay money into pension schemes may lead to other types of savings being diverted to meet the requirement.

In its response to the First Report of the Pensions Commission, the Mellon HR consultancy said compulsion could lead to many individuals and employers thinking they only need to satisfy the minimum requirements and not to provide anything further.

This could be a serious setback because political considerations could mean any compulsory contributions are set at a low rate, Mellon said.

Ian Ellis, senior consulting actuary at Mellon, said: “We are concerned compulsion may be seen as a ‘quick fix’ to the low savings problem, but without considering its full implications. This would be a major step, with implications far beyond the immediate area of pensions.”

Instead, the company suggests changing the present system which contains disincentives such as:

  • the inherent complexity of the present system

  • the lack of sufficient tax incentives

  • the uncertainties caused by the high level of means-tested state provision

  • the frequency of changes to state benefits.

The TUC has called for a new compulsory savings regime to be run by a body modelled on the Low Pay Commission and involving unions, employer representatives and independent experts.

The union body said people need to save 15% of their income to provide a decent pension and in a new compulsory system employers should provide 10% and employees 5%.

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