Workers to face pension edict 

Policy reverse boosts company schemes

More than 1m people are to be forced to join company pension schemes in a dramatic reversal of a flagship Thatcherite policy which led to millions of employees being ripped off in the £11bn private pensions mis-selling scandal. 

Ministers have brushed aside charges of authoritarianism to restore a regulation - abandoned by the then chancellor, Nigel Lawson, in 1988 - which will require employees to join an occupational pension scheme as a condition of employment. 

Up to 1.5m people have lost out on the benefits of company pension schemes in the last decade, a figure which has alarmed ministers who regard occupational schemes as the "great welfare success story of this century". 

Alistair Darling, the social security secretary, is planning to announce the reintroduction of the old regulation this autumn to give pensions groups plenty of time to adjust before the government's new "stakeholder" pension comes into force in April 2001. 

Under the government plan, companies will be allowed to demand that employees join their own schemes, ensuring that the stakeholder pension will be focused on people earning between £9,000 to £18,500 and whose employers do not provide an occupational scheme. 

Ministers decided to act after occupational pension scheme managers expressed fears that employees will leave company schemes for the low-cost "stakeholder" pensions. William Mercer, the big employees' benefits consultancy, warned recently that occupational pensions, which are worth a total of £640bn, must be "ring-fenced" from the effects of the stakeholder or risk a "disastrous" erosion of company schemes.

A government source said Mr Darling had taken these fears on board. 

"There is no point in reforming the pensions system in one area if we end up undermining it in another," the source said. "We are aware that we may be accused of acting in an authoritarian way, but we are determined to maintain the confidence of occupational pension schemes. It is a very difficult balancing act." 

Mr Darling's decision shows that the government has toughened up its carrot-and-stick approach to company pensions since last December's green paper on pensions reform in which he said he wanted to do more to encourage people to join company pension schemes, but stopped short of restoring the pre-1988 rule. Instead he pledged to consult the industry on the best way forward. 

Ministers hope Mr Darling's initiative will have political benefits, in addition to economic benefits, by contrasting Labour's approach to pensions with the "disastrous legacy" of Thatcherism. 

The decision in 1988 by Lord Lawson to abandon compulsion was designed to encourage people to invest in private pensions, but ended up exposing people to the pensions mis-selling scandal of the late 1980s and the early 1990s which cost £11bn.
Tony Blair has placed pensions at the top of his agenda for reforming the welfare state because of growing fears of a looming crisis in the next century which could see millions retiring into poverty unless action is taken. Recent figures showed that by 2050, one in three people will retire to a level where they will need means-tested benefit. 

The stakeholder pension is aimed at the 14m earning between £9,000 and £18,500. People earning below £9,000 are to be helped by a second state pension which will give a minimum pension guarantee. 

Ministers, who are in the process of issuing a series of consultation papers on their pension reforms, have recently turned their attention to the different level of tax rates which disproportionately benefit the rich. A working party is looking at the possibility of evening out the rates to help people on lower incomes. 

In one example, cited by a government source, working mothers who take a career break to care for their babies are penalised if they make payments to their pension scheme because they receive minimal tax breaks out of work. On the other hand, higher rate taxpayers in work only have to pay 60p for every £1 that goes into their pension fund. 

The source said: "There is an inherent unfairness in the system in this area. But this is a highly sensitive area and so is something that is being looked at with great care at the moment."

Guardian Saturday August 14, 1999

Why you will be forced to take a company pension 

Ministers are proposing to force more than a million people into joining company pension schemes. Phillip Inman and Patrick Sherwen report on the questions the plans raise. 

What is going on? 

The government wants to force employees to take out a company pension if their employer has one. Around 155,000 employers have a company scheme, but 20% of their employees refuse to join. Most of them are young and at the lower end of the pay scales. 

Why are so many people turned off company schemes? 

They will be asked to contribute anything between 5% and 8% of their salary towards the scheme, which they think is a bit steep when there are debts and other costs to pay. 

But doesn't the company chip in? 

Companies usually top up the contribution to around 17% of the employees salary. If an employee is in what's called a final salary scheme, the payment every month of £17 for each £100 of salary is enough to fund a pension worth two-thirds of their salary on retirement. Some companies even pay the whole lot. 

It sounds like a good deal 

It is. The money paid in each month by the employer is about twice the sum paid by the member of staff. A 25-year-old member of staff on the average salary of £20,000 paying 6% of their salary into a scheme will fork out £1,200 each year less tax relief of 100% (pension payments are paid out of income before tax). If the worker is on a salary of £30,000 by the time  they retire, they should receive a pension of £20,000 each year. 

Is there a catch? 

You must pay the same amount in every month, which makes the company pension inflexible. And some companies make it difficult to transfer the pension contributions to a new employer. Many employers have also dumped their final salary schemes in favour of something called a money purchase scheme. They will often make the same generous payments and build up the same lump sum at the end, but what each individual ends up with will be left to the market. 

Don't markets go up and down? 

At the time of retirement the company will purchase an annuity that will aim to turn a lump sum of say £200,000 into annual payments of £10,000. If the market is down one month it might only buy a pension of £9,500 or up the next and be worth £10,500. It's pot luck. At the moment, and for the foreseeable future, annuities rates are low. In a final salary scheme the employer must make up any shortfall. In a money purchase pension the employee takes the hit, making them unsurprisingly less popular with employees. 

If they are good value overall, why does the government need to force people to take them up? 

Over 5.4m adults in the UK said in a recent survey they did not know when they would be able to afford to start a pension. Many of them will be eligible for an company scheme. The government fears that when its new stakeholder pension scheme begins in 2001, employees will be tempted away from their company pensions. Stakeholder pensions are designed to be low cost and flexible, allowing people to pay in as little as £10 per month without any penalties. Employers would have been forced to offer employees without a pension a chance to join the stakeholder version and administer it for them if they say yes. Young people and those on lower pay scales might have gone for the cheaper option even though they would have missed out on employer contributions. Under the new rules the company scheme will be a must. 

Has it always been like this? 

No, it's a case of back to the future. Until 1988 membership of an company pension scheme was a condition of employment. 

Why did the government change it then, if it was only going to be changed back again later? 

The government, in the shape of Norman Fowler who was secretary of state for employment at the time, felt company pension schemes were a dampener on efficiency. They hindered job mobility. It was thought that someone on a company scheme would be less likely to change jobs than someone with a personal plan, so the hindrance was removed. The economic conditions at the time were also pushing many into unemployment who then found themselves tied to a poor value company scheme which they had been given no choice but to join in the first place. 

Did the new regime work? 

Not really. The common view is that the change was a serious mistake and paved the way for the pensions mis- selling scandal. 

In what way? 

The mis-selling scandal revolved round unscrupulous salesmen who persuaded their prey to pull out of their company scheme and adopt a personal pension in its place. In doing so they deprived many of the employer contributions they would otherwise have been in line for. 

How many were affected by the mis-selling? 

The review is still underway but in the first phase approximately 0.5m cases were unearthed. These people were deprived of £11bn they would have received in company schemes and by the end of last year had been paid £2.3bn in compensation. 

So in future I will have to join my company scheme if I am eligible. Can I take out a stakeholder pension too? 

This has not yet been decided. The government was expected to release a consultation document on this issue in July but it never emerged. The official reason given was that the cabinet reshuffle got in the way. Pensions industry speculation suggests it was because the contents are likely to cause controversy by preventing employees from taking out both types of provision. 

How will the changes affect me in my current job? 

It is unlikely that the new rules will be applied to existing employees. This would entail the retrospective introduction of new employment conditions and in theory could lead to redundancies. Consequently, the new rules will almost certainly only apply to those starting a job from September onwards.

Guardian: Saturday August 14, 1999