Pensions are firmly back on the agenda and the debate will be lively over the coming months.
This autumn, the Pensions Commission will deliver its recommendations on how the government should tackle the problem of under-saving. In its first report in October 2004, the commission estimated that as many as nine million people are failing to save sufficient amounts towards their retirement.
One of the key issues that the commission is examining is whether or not the government should force individuals, and possibly employers, to pay into a pension scheme to bolster future levels of retirement saving.
A recent survey of our business members gave the stark warning that forcing firms to pay into a pension scheme for all members of staff would be disastrous for employers and employees alike. One in five of the 800 businesses that the British Chambers of Commerce (BCC) surveyed said they would be forced to lay off staff if they were made to pay into pensions, while more than one-third would freeze salary increases.
The figures come as no surprise. Forcing employers to pay into pensions would simply increase the cost of employing someone, and it is inevitable that some firms would be forced to reduce the size of their workforce to meet this cost. At a time when our businesses are facing fierce competition from the likes of China and India, compulsory contributions are the last thing that UK employers need.
If forcing staff and firms to contribute is not the answer to the problem of under-saving, then what is? The BCC believes the solution lies in breathing new life into the voluntary system by simplifying the state pension and introducing new measures and incentives to encourage greater private provision.
Alongside a simpler, higher, flat-rate state pension, additional financial incentives are needed to encourage employers and employees to contribute to pensions. Our survey found that 57% of employers who did not provide a contribution said that cost was the reason, reflecting that pensions can be cost-prohibitive for many businesses.
Given this, the government should introduce an additional financial incentive to encourage more employers to pay into pension schemes. In addition, the government should fully explore the potential for developing multi-employer schemes as a means of helping smaller firms access lower-cost pension provision.
There should also be a drive to encourage employers that have occupational pension schemes to adopt automatic enrolment measures. Automatic enrolment requires employees to actively opt-out of a firm’s pension scheme if they do not wish to be a member of it, and can significantly increase scheme participation rates.
Such reforms to pension systems would produce a framework that was more conducive to private saving on the part of individuals and which, as such, would render the need for compulsion redundant. Business will wait with baited breath to see if the commission and, ultimately, the government, take this message on board.
By David Frost, director general, British Chambers of Commerce