Some have argued that compulsion is the only way to close the so-called ‘savings gap’ the shortfall between the amount people will need in their retirement and the amount that the state will provide.
They say the introduction of compulsory pension contributions is the only way forward, since encouragement to save for a pension has failed.
Others disagree. They say that compulsion is regressive because it applies equally to those who are least able to save. It is inflexible because it does not take account of changes in spending and saving priorities over a working lifetime. It is also illiberal since it restricts people’s freedom to choose how to save – or whether to save at all.
In some European countries, membership of a second pillar occupational pension scheme is already compulsory. Switzerland, for example, accepted the concept of compulsory occupational pension plans after a referendum in 1972.
In most of Europe, however, contribution to an occupational or other private pension scheme is still voluntary.
So who is right? We wanted your views. As in so many pensions issues, your responses reflect the fact that compulsion is not a black and white issue. Crucially, arguments for compulsion depend on the level at which it is introduced.
The overall view of the pension fund managers, administrators and trustees who answered our questionnaire is that some form of compulsion is necessary for pensions
A large majority - four out of every five respondents - thinks that people in general should be compelled to make some provision outside the state pension for some self-support during old age.
This could take the form of compulsory membership of an earnings-related pension scheme. One manager at a Danish pension fund says: “The state pension will not be enough to meet the demands of most people. If you want your pension to be close to your wages you will have to put up some sort of pension related to income while working. This is best done via some kind of pension saving related to the labour market.”
A minority feels that there is no place for compulsion in a pension system. One UK pension fund manager says flatly: “I don’t agree with compulsion. I believe the right approach is for the government to pay a flat rate subsistence pension to everyone. This should be set at a rate which ensures people are housed and fed.
“Above this subsistence pension all pension provision should be voluntary, at the discretion of individuals and employers. This should be associated with infinitely less prescriptive regulation of voluntary schemes – just concentrating on the basis of avoiding fraud and mis-selling.”
One of the problems of compulsion is that it affects both those with high and low incomes. A solution is to require only those people who are capable of saving for their retirement to save for a pension. This draws broad support from our respondents, with four out of five agreeing.
The case for compulsion is that merely encouraging people to save for retirement has failed. Opinion is divided here, with only a small majority in agreement. One German pension fund manager takes the argument further: “If one comes to the conclusion that non-compulsion has failed, then one should come to the further conclusion that it did so because the incentives to save for retirement voluntarily were not high or specific enough.”
There is less support for making contributions to a private pension compulsory. Only two in five respondents think compulsory pensions are the answer to the problem of under-provision for retirement.
One of the possible disadvantages of compulsory membership of an occupational pension scheme with fixed contribution levels is that it is too inflexible and does not allow for changes in a person’s savings and spending priorities. A clear majority of our respondents, three out of five, agree that this could be a drawback.
However, a Danish pension fund manager points out that compulsory schemes can be designed to be flexible: “You are free to structure such pensions as you like, even to put up a high degree of individual options.”
A UK pension find manager suggests that contribution levels need not be fixed. “The minimum contribution level could be set quite low with people encouraged to save more than the minimum, possibly with incentives to encourage larger contributions.”
Broadly, compulsory saving in an occupational pension scheme could be seen as a straitjacket, forcing people to save for a pension in a way that may not be the most appropriate for them. A small majority agree with this suggestion.
Similarly, compulsion could be regarded as an additional tax on earnings. Yet a large majority - seven out of eight managers - disagrees. One manager of a Portuguese pension scheme points out that “in a way, it is a tax that will prevent a tax on future generations”.
Is saving for a pension really a matter of personal choice? Are mandatory schemes an abuse of people’s freedom? Here opinion is divided. A small majority feel that compulsory schemes are not an abuse of personal freedom.
A Danish pension fund manager points out that “occupational and professional pension schemes are agreements between employers and employees. If that is an abuse of freedom, then all kinds of democratic decisions are”.
A UK pension fund manager puts it more bluntly: “An abuse of freedom is my having to pay additional taxes because others have failed to help themselves.”
Forcing people to save without convincing them of the need to save may be a waste of time. Perhaps improving financial literacy is more important than compulsion.
Only a minority support this idea. One manager speaks for many when he says “In theory, yes. But this approach has been followed for some time with insufficient improvement.”
Another points out that financial literacy “does not necessarily - in fact almost the reverse - lead to better or higher savings.”
Most feel that both compulsion and financial literacy are needed “to build an effective savings culture and attitude towards future consumption at retirement age”.
The manager of a German pension fund broadens the issue further. “Saving for retirement is not only a matter of financial literacy but also of attitude of mind,” he says. “To set the latter right is a matter of education in general.”
If the argument in favour of compulsion is accepted, should the obligation to contribute to an occupational pension be shared between employees and their employers?
A substantial majority of our respondents - eight out of 10 - believes it should. One speaks for many when he suggests that “some form of matching contribution would encourage greater savings with the concept of gearing up one’s contribution”.
One way to encourage the younger generation to save for a pension would be to allow them to draw down some of their accumulated savings before retirement – to buy their first house, for example.
Most of our respondents agree with this idea. The manager of a Belgian pension fund says: “One might argue that pensions savings can be done through different channels. I wouldn’t object if mortgage payments were also considered to be a form of pension savings. After all, to own a house often offers a considerable level of financial stability.
“Furthermore there is a tendency in Belgium, and probably in the rest of Europe as well, for the ‘young’ pensioners - those between 60 and 70 - to sell their large houses in the suburbs and buy small apartments in the centre of town, or service flats within a retirement home.”
A minority disagree. A UK manager describes the suggestion as “the worst investment decision possible, given that they will at some time need to sell it to realise the capital value, and it may be at the wrong time”.
But the main objection - if it is an objection - is that what people are saving for is no longer a retirement pension. As a Danish pension fund manager remarks: “Younger people might be more willing to save. But what has that to do with pensions savings?” And the manager of a French pension scheme, agreeing that such an idea would work, adds: “But it is not a pension fund.”
That is the nub of the matter. Savings and retirement savings are not synonymous. A Swedish pension fund manager shrewdly observes: “Pensions are only about money. What sort of saving is beneficial will differ between countries and individuals. For someone with a business that can be sold at retirement, an annuity at retirement might save the day. For others systematic saving is more appropriate.
“Who is to say there is only one way forward?” Perhaps in future we need to define much more clearly what is meant, and what is not meant, by a pension.