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A Reform That Can’t Be Allowed to Fail

  • By Alex Sullivan

Regular IFA Magazine columnist and pensions guru Steve Bee

But we can probably avoid compulsory saving, says Steve Bee

I was speaking to some of my friends the other day (don’t look so surprised – I’ve still got a few left!) and we were discussing the new pension reforms that are set to come in from next year. The reforms, as I’m sure you’ll know by now, will lead to something like 1.3 million employers setting up qualifying workplace pension schemes, enrolling their eligible employees into them and paying into them too. While it will be compulsory for employers to ensure their eligible employees are enrolled, no employee is being compelled to save for a pension; all auto-enrolled employees will have the right to opt out if that is what they want to do.

The discussion my friends and I were having went along the lines of: “What if the reforms fail?” and: “If they do, will that mean compulsion will be introduced?” That kind of thing. By ‘fail’ there, we were talking about maybe millions of employees opting out time after time –  with the result that we’d have over a million new pension schemes, but with hardly anyone in them. Sort of a ‘what if they held a war and nobody turned up?’ kind of scenario.

My view on all this is that these reforms can’t be allowed to fail, because millions of employees with no pension savings will mean that the spectre of means-testing will come back with a vengeance in the mid-21st century – and, as a result, take the public purse to hell in a handcart with it. That wouldn’t be a good outcome.

But compulsion doesn’t look too good a solution either. I mean, the system that these new reforms are replacing was based on compulsion. All employees in the UK have been required by law (ie compelled) to accumulate a workplace pension since 1961. Either their employers provided them with a decent pension through a company pension scheme, or the National Insurance system did it through the state second pension (aka the graduated scheme, Serps and latterly S2P). It has been impossible for employees in the UK to not accrue a workplace pension for over half a century now – even if the state second pensions that accrued were of the unfunded variety.

It would have been easy for the government to switch from the situation where all employees were accruing a workplace pension, but some of those pensions were funded and some were not. They could have simply have forced everyone accruing S2P benefits to contract-out and put their rebated National Insurance contributions into qualifying workplace pension schemes – job done! In fact, those of you with long memories will remember that was exactly what Keith Joseph’s short-lived reforms from 1974 would have achieved if his State Reserve Scheme had been left to flourish.

But it didn’t happen then, and I don’t think it’s going to happen now either. My view is these reforms are not all about the soft introduction of compulsion; quite the opposite in fact – I think they’re all about the end of compulsion…

September 2011