Compulsory saving for retirement, which is now under discussion in the UK, would be a mistake, says the Mellon Human Resources and Investor Solutions (HRIS) business.
In its response to the First Report of the Pensions Commission, HR&IS predicts that compulsion, in many cases, will lead to other forms of savings being diverted to meet the requirement. Compulsion could also lead to many individuals and employers regarding it as appropriate only to satisfy the minimum requirements and not to provide anything further, it adds. “This could be a serious setback as political considerations are likely to require that any compulsory contributions be set at a low rate,” adds HR&IS.
Compulsion within the private sector is a key issue to tackle, says Mellon. The bank points to potential problems with its introduction, such as how to apply it equitably across the whole population and the issues arising from compelling contributions into privately-managed arrangements.
Mellon believes that the decline in the level of saving under the present voluntary system is due to a number of current disincentives, such as the inherent complexity of the present system, the lack of sufficient tax incentives, the uncertainties caused by the high level of means-tested state provision and the frequency of changes to state benefits. It believes that if those problems were to be satisfactorily addressed then voluntarism could work and would be preferable.
With compulsion being high on the agenda Mellon found in a recently published survey 68% of employers were in favour of some sort of compulsion(1). However, Mellon warns an extra layer of bureaucracy will be a costly addition to employers’ provision of pensions for their employees.
We are concerned compulsion may be seen as a ‘quick fix’ to the low savings problem, but without considering its full implications,” says Ian Ellis, senior consulting actuary at Mellon – HR&IS. “This would be a major step, with implications far beyond the immediate area of pensions. However, effective change is long overdue, and we believe with the right Government support, employers and individuals can regain confidence to establish new long term arrangements.”