Sunday, May 18, 2008

Eliminating Pensioner Poverty

This is a little bit teckie but it likely to be of even greater long term significance to real people, than the current fuss over the improvement to personal tax allowances for low and middle income Brits.

The EU has allowed the government to extend the scope of auto-enrolment into contract pension schemes as well as trust schemes. The government will amend the 2007 Pension bill to allow for auto-enrolment from 2012. It was previously thought that this compulsion was illegal under EU regulations. This alone will affect some 4.7 million employees.

Okay, what this means is that in 2012, the government can now introduce a nation wide auto-enrolment scheme for all employed workers. If someone works for a company that has its own pension scheme they will be automatically enrolled in that scheme. All other firms that do not offer a pension scheme will have to auto-enrol employees into a Government sponsored Pension Personal account. Employees can pull out of the scheme but every year they will be enrolled back into it again.

The above paragraph is possibly amongst the most boring I have ever written. Co-incidentally I was just distracted by a sketch on TV from the show “Smack the Pony” where 2 women fell asleep as soon as their accountant started talking about pensions and tax allowances.

Bear with me as I think this issue is important. For the first time potentially all workers will end up with a lifelong private and state pension scheme. As always there is lots to moan about for example: – it should be compulsory for all workers and self employed, the contributions paid by employers is too low, investment risk is not shared, carer pensions etc.

However, nowadays, even in companies with pucker Final Salary schemes, up to a third of employees are not members of the company pension scheme. Losing the equivalent of at least 10-15% of their wages each year.

A little while ago I helped a union member go through her pension options with a company which only offered a group personal pension plan. The company will pay into a pension if the employee also contributes. She was horrified how many £1,000’s she had lost out in company contributions by not taking out the pension sooner. She had never "got around" to setting it up. She would have far preferred being enrolled when she first joined the company. The industry has a saying that pensions are "sold not bought".

For the first time ever in the history of this country, with cross party support, we could be just about to introduce a sustainable arrangement for a national pension scheme that covers all workers. This could (fingers & toes crossed) eventually get rid of the rotten stench that poverty in old age, has for far too long, besmirched our country.


Robert said...

I bet, we will see, knowing this Government it will find a way of bleeding it, or taxing it.

leftygirl said...

Have just realised that I must be completely sad therefore to have found this post really interesting. Am presuming this will apply to the public sector as well. I was really gobsmacked to hear how many people are not in the LG or NHS schemes - particularly in the lower paid groups who are also less likely to have savings. And I have often thought the union should publicise this more as effectively workers are saying - no thanks, please don't pay a significant percentage of my salary inta a pension for me - but usually don't realise this is what they are doing. Anyway, this will no longer be the case hopefully thanks for posting about it

John Gray said...

Facts Robert please facts!

John Gray said...

Hi leftgirl


Robert said...

Phew lucky my memory is OK, Gordon's Multi Billion stealth tax of pensions which caused the much hyped pension black hole, funny how you lot have memories which go back about an hour.

People have had stealth tax and not a lot else from Labour.

John Gray said...

Come off it Robert – independent research has made it clear that the ending of pension income tax relief made no significance difference to schemes. Check out Tom

BTW – when are you going to email me with your contact details???

Anonymous said...

John..that's bollocks..if the pensions are in such great shape why are so many final salary pension schemes being closed after the changes Brown made?...we have gone from being the envy of Europe to having a pensions crisis (unless of course you are an MP). Brown shafted all of us. If he's so bothered why doesn't he index link pensions to infaltions..that would help end poverty

John Gray said...

Hi Anon
Actually, I don’t think it is ...“wrong” but why have so many FS schemes closed down is a fair question?

Getting rid of dividends tax relief (sorry, NOT tax relief) did not help. Neither did the rise in the life expectancy; nor the contribution holidays and corporate raids; funds were also used to pension off vast numbers of middle managers and other “surplus” workers during the 1980’s restructures; Thatcher and personal pensions; City fraud; regulation and accounting standards has obviously made it tougher, which does makes things more expensive although safer; the government has obviously not intervened into the market place enough to defend FS schemes, especially the failure to allow companies to make membership compulsory again; weaker trade union also plays a role? Certainly poor governance by some trusts.

Anyone got any more reasons?

But I think the main reason is cultural rather than economic. Large companies simply value their workers less? They see them as inputs rather than assets. There is far less benign corporatism than in the heyday of FS schemes?

It is no co-incidence that FS pensions or extremely generous money purchase pensions are available to top executives in many companies who have removed them for ordinary workers.

Finally, we must not get too sentimental about FS schemes since they were only ever available to a minority of workers, while most Brits never had the chance to join one. So, this is one reason why these changes are so important.

BTW – the government is going to reintroduce index linking of state pension. It is a key part of the Personal accounts package. Yes, this will help end poverty.

Anonymous said...

If only we could all have the same working conditions and generous pensions as our local Government colleagues...with their early retirement etc... Oh err... no we are just expected to pay for them all.

John Gray said...

Hi Anon
I do wish as well that the same working conditions and pensions in LG were available to all workers. Society and the UK generally would be a much better and efficient place to live in.... and it is affordable – the well managed LGPS schemes actually costs less to run than most private sector Final salary schemes with similar benefits.

Glad to see that you are now moving towards Labour policies – well done!

Anonymous said...

Unfortunatly some of us have to work for a living to help pay for it all.

John Gray said...

Hi Anon
Come off it – apart form the sliding rate of contributions by members, employer contributions are “deferred pay” – this is a bit “red” coming from the likes of you?

No doubt you are equally upset about the 1/40th Final salary pensions kept for big company executives?

There again, perhaps you are seeing the light comrade?