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Pensions may be made compulsory, warns think tank

The economy could undermine the government’s new auto-enrolment pensions policy, forcing policy makers to look at radical new ideas such as low-cost public loans, additional behavioural ‘nudges’ and even compulsion, according to a new report from the Social Market Foundation (SMF).

22 November 2012

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Over the next two decades, the state will not be able to rely on individuals to save adequately for themselves, nor will it be able to afford to support families and retirees sufficiently through the welfare system, as it has in the past, says the SMF report.

This will force governments to intervene increasingly in people’s lives, potentially compelling people to save into pensions and making claims on future income by offering new income contingent loans to support individuals at pinch-points in their life, including for student loans, long-term care and childcare costs.

“The unprecedented long-term pressure on the public finances will mean that governments will not be able to afford the consequences of the current chronic under-saving of UK households,” said Dr Nigel Keohane, SMF deputy director and author of the report.

“Instead, they will increasingly have to nudge, prod and regulate people to manage their personal income and wealth in ways that achieve beneficial outcomes for them and for society as a whole.

“That means considering policies like compulsory pensions saving, low-risk pension products and income-contingent loans for childcare.” concluded Keohane.

The SMF report, ‘Jam Tomorrow: the next 20 years of savings policy,’ maps out the likely challenges facing the UK population and economy in 2032. It found that, if auto-enrolment does not substantially boost levels of engagement with pension saving, possibly because of low earnings growth due to chronic economic weakness, compulsion may emerge as the next logical step for savings policy.

It also said that if auto-enrolment diverts family resources from building accessible precautionary savings, or from paying down debts, it could undermine the ability of households to cope with short-term economic shocks such as unemployment.

Individuals are increasingly bearing financial risk in their provision for retirement, according to the report, which is intimidating and may be causing many to disengage from savings entirely. The kind of risk-sharing pension promoted by Pensions Minister Steve Webb may therefore be necessary to mitigate the risk individuals are exposed to.

Current pension tax relief will become increasingly expensive for the state as the number of higher-rate taxpayers grows rapidly over the coming years, the SMF report says.

For the full report, see

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