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Briefing Note by London Chamber of Commerce and Industry
The Pensions Debate
Oral Questions – Work and Pensions, House of Commons, Monday 8 November 2004.
London Chamber, the voice of London business, is extremely concerned about the state of
the British pension system. Britons should be saving £27 billion a year more for their
retirement than they are. Unless the current system is reformed, 64 per cent of British
pensioners will be eligible for the means tested pension credit in 20 years’ time that will rise
to 71 per cent by 2050.1
The Government forecast assumes that the basic state pension (currently £80 a week for a
single person) will remain linked to prices. This means that it will fall from 16 per cent of
average earnings to less than 9 per cent in 30 years’ time, according to the Pensions Policy
Institute. Consequently, more and more people will come to rely on the means tested pension
credit, which increase the income of poorer pensioners.2
Furthermore, employers are reducing the amount they pay into employees’ pension schemes.
The continued reduction in employer provision and the failure to increase personal saving is
likely to cause the situation to deteriorate.
The Government calls for simplification and choice, but the vast majority of practitioners in
the pensions industry consider that there is nothing in the current proposals that will inspire an
increase in the level of saving for retirement or of long-term saving.
London Chamber Key Recommendations
The London Chamber objects to any compulsion on employers to contribute to pension
schemes because this could be disastrous for the relationship between employers and
employees.
Priorities for the Government should be to:
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Undo the administrative burden on businesses. Extra time-consuming bureaucratic
demands distract businesses from performing well.
Encourage more people to save money for retirement or long-term savings.
Encourage employers to play a part in putting money into peoples’ retirement. If the
employer commits himself the reluctance of the employee to save will be less.
Encourage the self-employed to save for their retirement, as this group of people
will receive no help from an employer.
Ensure compulsory contribution is stopped by way of providing real incentives. It is
essential to provide direct financial incentives to people other than those at the
highest levels.
The London Chamber welcomes the British Chambers of Commerce’s (BCC) suggestion of
increasing the corporation tax relief available to smaller firms that contribute to pension
schemes, according to the size of their contribution and/or the proportion of the firms’
1
2
The Economist: “The battle for the older voter”, 18-24 September 2004, p. 37.
The Economist: “The battle for the older voter”, 18 – 24 September 2004, p. 37.
employees that are members of the scheme. It is crucial that the Government recognises the
need for such an incentive. 3
Indeed, by reforming the state pension system and by providing incentives that encourage
employers and employees to contribute to pension schemes, the London Chamber believes
that the voluntary system is preferable to compulsion, as compulsion would only serve to
suppress some employers and their employees, creating more problems than those it is
designed to solve.
Pension Assets versus Pension Promises
Despite the recovery in stock markets, a large gap remains between the value of pension
assets and the value of pension promises. The deficit is currently around £75 billion for
Britain’s top 350 quoted companies.4
In 1997 the Chancellor of the Exchequer abolished dividend tax relief for pension funds.
Consequently, pension investments (via pension funds) earn less net income than before
1997, and therefore, pensions have proved to be less. By taking £5 billion out of pension
funds every year, the Chancellor increased the Exchequer’s funds in a way that cost wage
earners far more in the long-term than a rise in income tax. London Chamber at the time
denounced the abolition as a hidden tax increase and a disincentive for saving and investment
via pensions.
Since the abolition of the dividend tax, interest rates have fallen significantly so that a larger
amount of savings is required to buy an annuity of the same worth. Equity markets also have
declined, leading to valuations that reduce that amount, and the dividend yield from it. In
addition, falling stock markets have wiped off the value of pension funds.
Recently, company defined-benefit schemes (i.e. final salary schemes) have been closed to
new employees. Companies have replaced these schemes, linked to final salary and years of
service, with defined-contribution plans (i.e. money purchase arrangement), which build up
an investment fund.
Companies want to be able to reward their employees with the best possible pension
arrangements. In a world of shortages and mobile labour markets, these arrangements are vital
to recruitment and retention. The Government needs to reduce the accumulative burden of
bureaucracy related to pensions and ensure that compulsory contribution is discontinued by
way of providing realistic incentives. Direct financial incentives must be provided to people
other than those at the highest level.
Compulsory Contributions
The current government is reluctant to introduce compulsory minimum contributions. One
reason is that it could be perceived as a hidden tax. It is believed that some employers would
object to the introduction of compulsory contributions, which could be damaging for the
employer/employee relationship. In particular cost would be an issue for Small and Mediumsized Enterprises (SMEs), which represent a large number of employers.5
British Chambers of Commerce line-to-take on Pensions Commission’s First Report (expected 12
October 2004)
4
The Economist: “How Labour Wrecked Your Pension”, 18 – 24 September 2004, p. 13.
5
Interview with Malcolm Deering, Director – Technical Services of Business Service Plus Limited,
Employee Benefits & Pension Consultants, 6 October 2004.
3
There appears to be doubt, however, as to whether compulsion would necessarily increase the
level of saving for retirement, rather it would lead to a reduction in the level of other longterm savings. For example, Australia introduced compulsory employer contributions in 1986.
Since this time Australia’s long-term savings position has not showed any sign of
improvement. Some would claim the situation has worsened as people have reduced other
forms of saving, believing that pension contributions alone will safeguard their retirement.6
Incentive
Currently, the only incentive to save is the tax relief upon contributions and the basis of taxfree build up. Last year it was the highest paid taxpayers who received over one-half of the
tax relief for pension savings. The higher paid are those who are more able and more willing
to make long term savings. The lower level of earners seems to be failing to make long-term
savings, but it is precisely this group who have the greatest need to make such savings.7
Saving
The London Chamber supports a major reform of the pension system and believes more tax
incentives are required to ensure that employers and employees can sustain pensions
contributions with an acceptable level of minimum benefits. London Chamber argues that the
complexity of the present system together with its reliance on means testing only serves to
discourage people from saving. We need to see a simpler, flat rate basic state pension and an
end to means testing. London Chamber is reassured that such a system will act as an
incentive, rather than a disincentive to greater pension provision.
However, individuals must understand the amounts required to provide for their retirement
and the advantages in saving over a prolonged period. According to Bernard Thornton,
Chairman of the London Chamber Policy Committee, ultimately, individuals must accept
the pension equation: “an adequate retirement demands consistent saving from an early
working age combined with a longer working life”. This is not satisfactory – either to the
young struggling to buy their first property or faced with the prospect of increased debt
from higher education, or those hoping to retire in their fifties. But it will become a fact of
life.8
British Chambers of Commerce line-to-take on Pensions Commission’s First Report (expected 12
October 2004)
7
Interview with Malcolm Deering, Director – Technical Services of Business Service Plus Limited,
Employee Benefits & Pension Consultants, 6 October 2004.
8
Bernard Thornton of BDO Stoy Hayward and Chairman of the LCCI Pension Committee: “The
Pensions Bill - how will the changes affect your business ”, LCCI Pensions Seminar, 6 October 2004.
6