The Big Question: Should everyone be forced to save for their retirement?

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The Independent Online

Why is this important now?

John Hutton, the Secretary of State at the Department for Work and Pensions, unveiled the Government's blueprint for transforming Britain's pensions system yesterday. The centrepiece of his proposals was a plan to require all employers that don't currently offer staff an occupational pension to join the new National Pensions Savings Scheme (NPSS). These employers will then have to automatically enrol staff in the scheme, unless workers specifically opt out.

The reform will move Britain a step closer to compulsory pension saving, which has already been introduced in several countries, including Australia. Up to 10 million people will be covered by the NPSS. They will each be required to contribute 4 per cent of their salary while their employers will have to pay 3 per cent. The Government will contribute a further 1 per cent on behalf of each member.

Do we need such radical reforms?

Britain can no longer afford the pensions system we have today. Not only are life expectancy figures rising dramatically, but the birth rate in the UK is falling. The result is we have a rapidly ageing population - every year there are greater numbers of retired people compared to the number of working people around to pay taxes to support them. In 1950, there were four people of working age for every one pensioner. Today, the figure is 2.7 and the number is expected to fall to 1.1 by 2050.

This demographic shift affects both the public and the private sector. The Government faces a dramatic increase in the cost of paying state pensions and has already said it will raise the retirement age to 68 by 2050.

Employers that provide occupational pension schemes are also finding it difficult to pay the incomes of an increasing number of pensioners from the money paid in by people still working. Many companies have therefore closed final-salary pension schemes, the most generous type of provision. The number of employees covered by such schemes has already fallen by almost a third.

Lord Turner's Pensions Commission, which concluded a three-year inquiry into these issues last December, suggested that the pain of dealing with the pension crisis should be shared between the Government, employers and employees. Mr Hutton has broadly accepted Lord Turner's recommendations and yesterday's White Paper will become law later this year.

Will the new scheme work?

The 10 million potential members of the NPSS do not currently have access to a private pension scheme at work. While they will have to give up 4 per cent of their pay under the new scheme, many will welcome the additional 4 per cent combined contribution on offer from their employers and the Government. Without the NPSS, many of the 10 million will have no savings of their own for retirement.

However, critics of the Government's reforms have several concerns. The most obvious flaw in the scheme is that it does nothing to help self-employed people. Similarly, people taking time out of work to look after children won't be in the NPSS during periods when they are not being paid a salary. This group, mostly women, are currently one of the worst-off in terms of pension provision so can ill afford to miss out.

Another problem is that retirement income earned under the NPSS will reduce savers' entitlement to means-tested benefits in retirement. Put another way, people won't benefit from every penny they save, because some of the money will disqualify them from receiving state benefits. In a few cases, people could actually end up worse off.

Finally, some campaigners are concerned that employers currently offering pension schemes more generous than the NPSS may see the reforms as an opportunity to cut their costs. The National Association of Pension Funds has warned that some employers may cut the pension contributions they make for staff down to the minimum NPSS level.

But won't many people be better off?

The Government's argument is the old utilitarian one about the greatest good for the greatest numbers. While there will be losers under the reforms, millions who don't currently save for old age will begin doing so.

Even so, don't start looking forward to a wealthy old age simply on the basis of these proposals. The Pension Commission calculated last year that a 35-year-old joining the scheme on a salary of £23,000 could expect a pension of just £3,000 a year in today's money. People will have to make additional voluntary contributions to produce a higher pension.

What about those who miss out?

The Government points out that state pensions will become more generous under separate reforms announced last month. By 2050, people will have to wait until age 68 to claim their Basic State Pension, but the benefit will be worth more under plans to link increases in the rate paid to earnings inflation.

Also, the number of years of national insurance contributions required to qualify for a full basic state pension will be cut by a third, to 30. This should help more people qualify, particularly women.

Still, while the value of the basic state pension will rise steadily in the years ahead, it will still only be worth 17 per cent of the pre-retirement salary of an average earner. The self-employed, meanwhile, will still have access to private plans such as the stakeholder pensions offered by insurance companies. And ministers did reform the tax treatment of pension contributions last April, which gives people using these plans greater flexibility.

Why not just make it compulsory to save for a pension?

Auto-enrolment is a halfway house between compulsory saving and leaving pensions completely up to the individual. In part, it's a political compromise, because all the main political parties are very nervous about being accused of imposing additional taxes - and that's what compulsory pension contributions might look like.

However, there are plenty of people who have greater financial priorities than retirement saving. Younger workers, for example, may prefer to clear student debt or save a deposit for a first home before thinking about pensions. Low earners may simply not have sufficient spare cash to pay anything into a pension.

Lord Turner's report estimated that roughly half of Britain's 35 million working population was saving nothing at all for old age. Yesterday's proposals are expected to cut that figure in half again. But that would still leave more than 8 million people with no savings of their own for retirement.

Will government reforms defuse the pensions crisis?


* Raising the state pension age to 68 over the next 40 years will reduce the burden on taxpayers

* Introduction of the National Pension Savings Scheme will give an additional 10 million people access to private pension plans

* The pain of solving pensions problems will be shared between the state, employers and individuals


* More than 8 million people will still have no savings for old age

* The NPSS will reduce access to means-tested benefits and could encourage employers to cut the value of more generous pension schemes

* Despite more valuable state pensions, even those who join the NPSS will still retire on low incomes

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