Compulsory pensions urged to fill funding gap

The only way to fill the growing gap between what people need to save for their retirement and what they are currently putting aside is to introduce compulsory pensions, says a report published today by Datamonitor.

This gap is estimated at £27bn, and the Datamonitor report finds that low-income earners, women and graduates are the biggest contributors to it, and are relying too heavily on the state for support. The report concludes that the Government has failed with its existing system of tax incentives to encourage savings and workers need 'no frills' compulsory occupational pensions. These would give consumers greater protection from volatile stock markets, and would also allow flexible withdrawals.

The Government is under pressure to improve pension savings in the UK, but has so far held fast to the voluntary system. It has, however, opened the door to the possibility of compulsory pension saving by setting up a commission at the end of last year to investigate its merits. Adair Turner, vice chairman of Merrill Lynch, is heading up the commission that will, over the next three years, assess "whether there is a case for moving beyond the current voluntarist approach."

Countries in the EU currently spend 10.4 per cent of GDP on public pension provision and future plans will increase this to 13.3 per cent in 2050. The UK, however, is the only country in the European Union that is proposing to reduce public spending on pensions over the next 50 years, from 5.5 per cent to just 4.4 per cent of GDP.

"Britain is trying to move away from workers supporting pensioners by encouraging individual saving," Liz Hartley, author of the report, said yesterday. "Efforts have focused on encouragement for employers and employees, without tackling the issue of affordability. Education and marketing of products has been weak, with providers quickly losing enthusiasm due to a lack of demand and poor profits," Ms Hartley said.

She suggests that the Government first bring in employer compulsion, with employee compulsion following later. But not all employees would be included in the compulsory system, according to Datamonitor. Those workers on the lowest incomes should rely on state support, while small employers or new business start-ups would also be excluded.

It recommends that part-time and temporary workers should be included in the compulsory scheme, and the report points to the success of mandatory pension schemes in Australia, the Netherlands, Sweden and Switzerland.

The report also urged the Government to reconsider the 1 per cent charge cap in place on pension products. The report says this is too low and should be between 1.5 and 2 per cent to give sufficient margins to pension providers.

Were the Government to introduce further compulsory savings through the workplace, it would find support from the Trades Union Congress, which has been campaigning for compulsory contributions on the basis that pensions are deferred pay for workers.

But such a move would be strongly opposed by the CBI on the grounds that they would put many employers out of business. Employers are already battling with spiralling pension costs, which can cost as much as 25 per cent of pay roll.