The Trades Union Congress (TUC), the central bureaucracy of the British trade union movement, today warned the British government against copying American attempts to reform pension provision through tax incentives for employers. It urged them to adopt instead the Australian model of compulsory contributions.
Lessons From 401(K) Plans, a TUC briefing paper published today, argues that the US 401(K) pension has failed in its aim to raise the numbers of Americans saving for retirement despite the tax incentives it offers employers. The TUC says occupational pension coverage in the US has not risen above 50 per cent since the schemes were launched twenty years ago because employers have simply closed final salary pensions and forced employees down the “far riskier” 401(k) defined contribution route.
The TUC says the failure of 401(K) plans to boost pension saving in the US shows that minor incentives will not generate the savings increase the ailing UK pension system needs. The TUC is urging the government to introduce a compulsory system similar to the Australian model in which employers would contribute 10% of pay, if necessary phased in through a strict timetable starting at 4%. Employers would get the power to ensure workers who can afford to join occupational schemes actually do. Australia phased in compulsory employer contributions up to 9% over ten years and now around 90% of workers have a pension, compared to only 50% in the UK and US.
“The gulf between retirement saving in the US and UK, and Australia, should convince us to go down under on pensions, not West,” says TUC Deputy General Secretary, Brendan Barber. “The financial incentives for employers in the 401(K) plans have not increased pension take-up in the US. In fact the scheme has encouraged American employers to replace secure final salary schemes with risky plans that are heavily invested in employers’ shares. US pensions are in no better state than the UK’s and are certainly no model for the radical reform our system needs. The Australian system shows that what works is compelling employers to contribute to pensions and letting them make their staff join schemes.”