Compulsory pension saving 'won't work'


The high cost of housing in the UK makes the idea of forcing employees to contribute to a pension financially unviable, according to figures released this week.

Compulsory pension saving was one idea floated in Adair Turner's review of the UK pension system as an effective way to minimise poverty in retirement.

But according to research by Mercer Human Resource Consulting, Britain's increasing housing costs mean first-time buyers in particular simply could not afford to meet the required level of saving.

Mercer’s research shows that the mortgage cost for a first-time buyer on an average income rose from 32% of net pay in 2002 to 41% in 2004.

This increase in housing costs relative to pay has effectively ‘swallowed up’ the extra contribution Turner suggests should be put towards a pension.

Moreover, if interest rates were to increase by one per cent as predicted, then 45% of average take-home pay would be needed to pay a mortgage.

Increasing student debt is also making it more difficult to save and people are now buying their first homes much later.

Mercer's Dr. Deborah Cooper said: "Turner has put forward a number of suggestions about how we can close the gap between hope and reality for pension savings. While compulsory pension saving sounds like a pragmatic solution, it is unaffordable and unrealistic, at least for some."

Rather than introduce compulsory pension saving, Mercer – like many other pensions specialists – is calling for the state system to be reformed so it is straightforward and sustainable.

It suggests the basic state pension should be combined with the flat rate state second pension to provide a single, flat rate, integrated state pension which increases in line with earnings.

With the integrated state pension set at a sufficient level for most people to avoid means-tested top-ups and the eligibility age set high enough to make it affordable, people could then make supplementary contributions when they were able to.

"One size fits all compulsory pension contributions will simply not work," said Dr. Cooper.