A lasting solution for the future provision of pensions
The future provision of pensions is now one of the biggest issues facing government, business and individuals. Without decisive action being taken over the next few years, this will become a major problem that will affect all of us for many years to come. To make progress, we must all face up to certain realities, consider where we are today and identify what we are prepared to do. The proposals in this report are EEF’s constructive contribution to the important debate that is now taking place on how to achieve a lasting solution on pensions.
The role of employers in developing occupational pensions
Employers need to play a key role in developing the way forward on pensions. Business is already involved as a major contributor to the funding of both occupational and personal pensions. It also pays both the wages from which individuals make pension contributions and the taxes that partly finance state pensions. However, the involvement of business in occupational pensions exposes it to many complex issues that make major demands on management time. In the future, these demands could cause firms to lose focus on the core issues of developing new and improved products, processes and services, entering new markets and raising productivity.
Managing pensions, managing risk
Pensions also expose companies to rising levels of risk that have the potential to bring good companies down and, in many other cases, to incur increased costs that prevent them from making much-needed investment in their future. Indeed, some EEF members are stating that these risks have now become so significant that managing their pension scheme is becoming as important to them as managing their business. In addition, some employers are concerned that large pension funds on which employees now rely for a significant part of their retirement income are not being managed by professionals with financial expertise.
Reducing the burden on businesses to improve occupational pension provision
Business is already in so deep that it cannot now walk away from pensions issues and it is unrealistic to expect that it would be allowed to do so. It would also not be in the interest of those firms that want to use pensions as a key part of their human resources strategy to recruit, motivate and retain the talented and committed people who are the basis of their future success. At the same time, we need to find a way through the risks, regulation, sheer complexity and drain on management time that, combined, inevitably mean that some employers are deterred from providing pensions for their employees and which are causing many others to re-examine their current involvement. We must also address the factors that cause some companies to opt out completely from pension provision, placing the burden disproportionately on those that remain involved, and on the taxes paid by employers and employees.
A flexible approach to occupational pension provision
However, we need to do this in a way that offers employers flexibility and choice in how they engage with pensions. At one extreme there will be companies that will want to persevere with long-established defined benefit schemes. At the other extreme there will be, generally but not exclusively, smaller firms that wish to limit their involvement simply to paying monies towards their employees’ pensions, which are then managed by someone else. In between, there will be a variety of firms that still want to run their own pension scheme but will differ in how far they want to get involved in its management.
EEF's proposals for meeting the needs of an ageing society
In this report we have put together a package of measures that we believe will meet these needs but will also address the other pressing issues facing the UK’s ageing society. These include the need to provide pensioners with dignity in retirement and to recognise that our labour market and society has changed substantially since the current pensions system was set up. This package also recognises the need to overcome the traditional reluctance of individuals to make important financial decisions such as saving for their retirement. Our package should also be affordable for individuals, employers and the government and be capable of being sold as a comprehensive package to different interest groups. Finally, it should facilitate the better regulation of occupational and private pension arrangements.
The role of government in creating a supportive environment
These measures must be supported by efforts to raise significantly the understanding of financial issues among the general public, increase their awareness of the need to save for retirement and boost employment rates among older workers. Government must also play its role by maintaining strong and stable economic growth. Strong growth in profitability and in disposable incomes will improve the ability of both companies and individuals to make pension contributions as well as enhance the investment performance of their savings for retirement. Continued economic stability is also needed to encourage individuals to take a long-term perspective and help them make rational decisions about saving for their retirement. It is therefore vital that the government seeks to achieve higher levels of productivity performance by encouraging innovation and investment in skills. It must also avoid damaging increases in taxation and regulation as well as restrain the growth of public sector spending. Part of this must involve reforming public sector pensions given the increasing financial burden that they are now imposing on taxpayers and therefore on the ability of people to save for their retirement.
A simple, transparent and inclusive pensions system
If we succeed in achieving these objectives and in developing a consensus on the way forward, there are some major prizes to be won. It will allow employers to concentrate on running their companies and avoid putting their business at risk, but still enable them to be involved financially in providing pensions for their employees. In addition, the state would play a far more effective role in preventing poverty in retirement, the burden of pension provision would be shared more fairly among employers, and individuals would be better equipped to take financial responsibility for themselves. We believe that this can be achieved by creating a pensions system that is simple, transparent and inclusive, and gives individuals a real sense of ownership, backed up by steps to improve financial literacy.