Compulsory pensions would cost Treasury billions

2005

Forcing Britons to make retirement savings would lead to a £4 billion black hole in the government's finances and lead to a reduction in tax relief on savings.

Whilst pensions have been somewhat overlooked in the Labour Party's manifesto, pension issues still remain a hot topic with the arguments for and against compulsion continuing to be hotly debated.

But according to figures released by Aon Consulting, if compulsion was introduced in the UK at a rate of 9 percent of pay (the Australian model), then compulsion would cost the Government £4 billion per annum in tax relief.

The additional £4 billion per annum in cost would arise because money that would previously have gone in wages or profits, which are taxable, would be diverted into pensions savings, which attract tax relief.

"With compulsion being on the agenda of many politicians during the build-up to the elections, proponents of compulsion need to outline how they'll fill the hole in government finances," said Donald Duval, Aon's chief actuary.

"While over time compulsion would increase private pensions and reduce the need for the pensions credit, in the short term the Government would still face a sharp drop in revenue," he added.

Duval pointed out that in Australia, where compulsory pension saving was extended to all workers 1992, the Government was forced to start taxing previously tax-free pension contributions at 15 per cent – further adding to the unpopularity of the policy.

Earlier this year, a report by consultants Mercer described the idea of compulsory pension saving as " unaffordable and unrealistic" because the high cost of housing in Britain meant that further saving was simply impossible for the majority of first-time home buyers.

Meanwhile a report by the Association of British Insurers published last week warned that there is no "one-size-fits-all" solution waiting ready-made in any other country and that forcing people to save is not as simple or as efficient as it might seem.

Pension arrangements need to be tailor-made to local circumstances, the ABI said, and while human psychology can be harnessed to make voluntarism work, any effective pension regime needs a sound state pension at its core.

"Compulsion on low earners may take money away from essential current spending," the ABI report warned. "Compulsion may distort investment flows. If set at the wrong level, compulsion may still fail to provide adequate incomes in retirement."

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