EEF, the manufacturers’ organisation has called for a radical overhaul of the UK’s pensions system by 2015 with a new structure that will involve Government, employers and employees taking responsibility for funding future pension provision.
The proposals are contained in a comprehensive report published today and submitted to Adair Turner’s Pensions Commission. They comprise three key features:
- an enhanced basic state pension
- minimum compulsory contributions by both employers and employees
- a third tier that will release private sector provision from burdensome regulation and encourage additional voluntary contributions.
Commenting on the report, Alan Wood, EEF President and Chief Executive of Siemens UK plc, said:
“We have to recognise that putting a sticking plaster on the current pensions system is no longer an option and that government, employers and employees will all have to play their part in the future funding of pensions in the UK. We now need a frank and open debate so that all parties understand the various options for addressing this important issue as we seek to build a consensus on the way forward.
“Our fully costed, three-pillar approach sets out a constructive and realistic solution to the UK’s pensions problems. It is a modern, flexible approach that reflects the changing nature of today’s labour market and society.”
EEF believes the proposals will provide very real benefits to the economy in three ways. Firstly, they will address the risks business now faces in running occupational pensions schemes with the associated costs and administrative burdens. Secondly, they will allow the flexibility of either retaining existing schemes or, making pension contributions for employees in a system that does not require employers to manage these funds. Thirdly, they will benefit individuals by reducing pensioner poverty and means-testing, encouraging higher savings levels and providing better retirement income for women who are particularly disadvantaged by the current system.
The report recognises the changing nature of today’s labour market and society. It identifies important changes to the employment of older people, retirement arrangements, the tax system as well as general financial awareness that will need to be made to support this new structure.
The proposed three pillars are:
First pillar:
An enhanced basic state pension of 21% of average earnings at 65, rising to 25% of average earnings at 75. These ages would be reviewed regularly by an independent body, which would make recommendations to government. This pension would be uprated annually in line with movements in average earnings. Eligibility for this pension would be based on the National Insurance contributory principle, modernised to reflect today’s labour market and society, and would result in a reduced need for means-tested benefits.
Second Pillar:
A national scheme based on compulsory minimum pension contributions by all employees and employers of 2% of earnings each in 2015, increasing gradually to 4% of earnings each by 2025. The “employee” contribution of those on less than 25% of average earnings would be paid by government and all parties would be encouraged to make additional voluntary contributions. Any employees or employers contributing more than this minimum to separate pension arrangements would be exempt from the national scheme.
Individuals would be able to choose from a limited number of investment funds, with the private pensions industry bidding competitively, say every 5 years, to run them and be able to transfer between these funds easily and at no cost. This approach would provide individuals with some choice in an environment in which investment costs were low and risks understood.
Third pillar:
The combination of the first and second pillars would provide individuals with a higher level of secure retirement income than today’s arrangements and therefore reduces the need for burdensome regulation of the third pillar. This gives the opportunity for employers and individuals to save more for retirement if they wish to do so in a less regulated environment that encourages higher levels of saving.
Cost:
The proposals have been fully costed by the Pensions Policy Institute (PPI) and, for comparative purposes, the PPI has assumed no change in government pension policy This shows that the cost of the first pillar would be 6.5% of GDP in 2015 compared to 6% of GDP today. By 2055, the cost of the first pillar will have increased to 8% of GDP, although this would be lower if the employment rate for older people was increased. A substantial part of the additional cost of the proposal could also be met by savings in public sector spending.
However, if the government fails to grasp these opportunities to reduce costs and increase income, one possible way of meeting the cost of the proposal could be to raise National Insurance contribution rates. The PPI has estimated that this would require an increase in the rates for both employers and employees of between 2% and 3% by 2055.
The PPI has also examined the effect that the proposals would have on different groups of people when they retired in 2055.The vast majority of people at age 75, and most between the ages of 65 and 74, would enjoy higher incomes in retirement than under the current system.
1. The EEF’s report, submitted to government and the Pensions Commission, was put together by a group of senior finance, pensions and human resources managers from across the EEF’s membership of both large and small companies. It was chaired by Paul Lester, the Chief Executive of VT plc and a past EEF President
2. The costs prepared for EEF by the PPI are for illustration only and simply identify one possible way in which the government could choose to finance our proposals. They do not take into account the additional government income that would be generated by increasing the employment rate of older people or savings in government expenditure from, for example, reducing the number of people on disability benefits or reforming public sector pension schemes.
3. 21% and 25% of average earnings are, respectively, currently about £111 per week and £132 per week.
4. Under EEF’s proposals for the second pillar, the self-employed would have to make the minimum ‘employee’ contribution but we have left for further debate whether they should also make the minimum ‘employer’ contribution.
5. EEF, the manufacturers' organisation, has a membership of over 6,000 manufacturing, engineering and technology-based businesses and represents the interests of manufacturing at all levels of government. Comprising 11 regional Associations, the Engineering Construction Industries Association (ECIA) and UK Steel, EEF is one of the UK's leading providers of business services in employment relations and employment law, health, safety and environment, manufacturing performance, and education and skills.