Pensions. A time to save

Employers break ranks over forced saving for retirement

UNLIKE the rest of Europe, Britain has long relied upon a partnership between the state and employers to provide pensions. But in recent years, this voluntary approach has looked increasingly shaky as companies have taken fright at the risks involved in financing retirement benefits. At the end of November the government-appointed Pensions Commission will issue its long-awaited report on whether compulsion is now necessary.

Until now, employer groups have been adamantly opposed to a policy of forced retirement saving. “Compulsion is not the answer,” said Sir Digby Jones, director-general of the Confederation of British Industry (CBI) in May. “It would be viewed by both employers and employees alike as yet another stealth tax.” A month later, David Frost, director-general of the British Chambers of Commerce (BCC) said, “compulsory pension contributions are the last thing that UK employers need”.

However, the EEF, an influential employer group representing manufacturers, has now broken ranks. In a report published on September 1st, it backs the compulsory principle. “We no longer think that voluntarism will work,” says David Yeandle, the EEF's deputy director of employment policy.

As part of a general reform of pensions, the EEF calls for the introduction of compulsory retirement saving in ten years' time. Employers and employees would initially each pay a contribution rate of 2% of pay. This joint rate of 4% would rise to 8% by 2025. The money would be put into a small number of low-cost private investment funds.

The Trades Union Congress, which has been lobbying for compulsion, naturally welcomed the EEF's conversion to the cause. Describing the report as “hugely significant”, Brendan Barber, the TUC's general secretary, said: “No longer can other employer organisations pretend that business is united.”

The disunity among employers will doubtless have some effect on the Pensions Commission and government ministers, but not as much as Mr Barber hopes. The EEF's backing for compulsion reflects the distinctive nature of its member firms. Employers play a more prominent part in pension provision in manufacturing than in some other types of private business. The worry for firms that already contribute to pensions is that they may be undercut by those that do not.

Mr Yeandle says that the EEF's members “feel increasingly that there needs to be more of a level playing field”. Surveys of its membership show rising support for compulsion among companies already providing pensions. In 2004 roughly two-thirds backed employer compulsion, up from a half in 1998.

By contrast, the membership of the BCC is more broadly based, with more small businesses. A survey of its member firms earlier this year found that half of them did not provide a pension contribution for their workers. The most important reason such employers gave was that they could not afford the extra cost.

The government will take note of the EEF's call for compulsion, but it will also pay heed to the CBI, the employer group with the most political clout. Like the BCC, the CBI is worried about the impact of compulsion on smaller employers. It fears that compulsion could allow the government to withdraw tax incentives that underpin private-pension provision.

The EEF's proposed timetable for compulsion, starting in 2015, could turn out to be more significant than its backing of the principle. When the government finally sets out its policy, it may prefer to threaten compulsion at a future point if firms fail to increase their pension provision. Whatever their disagreements, employers will continue to wriggle on the hook.