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MONEY COMMENT
Company Pensions May Become Compulsory

By Cliff D'Arcy
February 3, 2004

I received an interesting press release from the Department for Work and Pensions earlier today, which suggested that the government plans to do more to tackle the '27 billion savings gap'.

Andrew Smith and Malcolm Wicks, the Secretaries of State in this field, want us to have more control over our retirement planning. They plan to introduce a web-based retirement planner to give us a clear picture of our retirement prospects, based on personalised information about state, company and private pensions. This online planner should illustrate how saving more for retirement (and other options, such as delaying retirement) would benefit workers.

Crucially, the government recognises that not everyone joins their employer's pension scheme when starting a new job. This is nearly always a grave mistake, as employers usually bear the administration costs and make extra contributions on top of workers' payments. Ministers have suggested three possible approaches to deal with this problem:

  1. New joiners must make a firm decision whether to join a company's scheme or not (which is sort of where we are currently).
  2. Workers could commit to saving more in the future, signing up to higher contributions further down the line.
  3. Automatic joining, where new joiners become members of a workplace scheme by default, but retain the option to opt out (a so-called 'negative option' - "tick this box if you DON'T want to join").

In addition, the government plans to increase education and awareness of retirement issues through better personal finance coverage in the National Curriculum. Also, firms that don't provide company pension schemes could be made to provide decent information on the alternatives. Other aims include increasing the number of state pension forecasts to over nine million by 2005/06, and producing three million forecasts that combine state and employer pension schemes by the same point.

This initiative is being promoted under the catchy title of 'Informed Choice', aimed at creating 'simplicity, security and choice'. Much of it makes sense - I'm particularly keen on making company pension schemes compulsory, especially very attractive final-salary (also known as defined-benefit) schemes. These are so generous - and therefore expensive to run - that many companies no longer allow new starters to become members.

There are precious few circumstances where employees would benefit from not joining a company scheme - most people would be worse off by making alternative private arrangements or having no pension provision at all. Making it a condition of employment that new starters join company schemes would undoubtedly be of benefit to UK workers in the long run.

Research from the National Association of Pension Funds, the trade body that represents the interests of company pension providers, shows that in firms where employees are automatically enrolled in the pension scheme, over nine out of ten employees (91%) are members. Where members opt in, take-up falls to under three-quarters (73%).

Governments of other countries - including Australia, Chile, Denmark and the Netherlands - have been even more radical, forcing workers and/or companies to make compulsory minimum contributions into retirement savings plans.

So, if you're not setting aside any money for your grey years (in pensions, ISAs or similar), you need to think long and hard why you're taking this line. Otherwise, your retirement might be filled with day-care centres and boiled cabbage, instead of cruises and caviar!

More: Visit our Pension Centre.