The ABI has called for automatic enrolment by workers into their company pension schemes, with an additional option to opt out, as part of a greater package of reforms to encourage a new savings culture in the UK.
Launching its strategy for pension reform today, Director general of the ABI, Stephen Haddrill, says a modest contribution of 3% by both employers and workers to a scheme, would see an overall pension saving increase of £4.2bn a year.
The insurance industry body says as many as 4.6 million employees are not joining pension schemes offered by their employers, thus forfeiting employer contribution and tax benefits.
Inclusive in its package for reform, the ABI calls for the implementation of a workplace advice credit, targeted mainly at small businesses, which it believes will enable firms to claim back as much as 50% of the cost of providing a set amount of financial advice to each employee.
Haddrill says: “Over time, this proposal would bring financial advice to four million employees, potentially closing the savings gap by as much as £2.1bn, at a cost of around £100m each year to the Government.”
In hand with auto-enrolment, it proposes the idea of a pension contribution tax credit, as carrot for employers to encourage the take-up of company pension schemes.
The idea is to provide employers a refund of their National Insurance payments, as long as they make a set level of contribution to employees’ pensions with a minimum two-thirds of their staff joining their work pension scheme.
The ABI believes this would increase saving by around £1.5bn, at a cost to Government of £500-700m.
The ABI also points out many individuals collect a great amount of relatively small pension pots, or stop paying into their main pension after a short period. It therefore calls for legislation, which requires employers not offering pensions for their employees to pay pension contributions into any stakeholder scheme nominated by an employee.
Haddrill says here is no single ‘magic bullet’ solution to the national pension issue.
He says: “We urge the Government to develop a comprehensive package of measures to support the poor and promote a private savings culture – a package based on consensus and sound evidence.”
Head of pensions and savings development at the ABI, Helen McCarthy also stresses the importance for clearer information regarding pension education for employers.
She says the ABI will look to methods of encouraging employers to fund advice about the take up of pensions for employees, especially low earners, who would otherwise not be able to afford it.
When questioned about the possibility of compulsion, McCarthy says it is not the intention of the ABI to recommend such a measure, adding: “Compulsion by any form is a blunt instrument,” while Hadrill adds such a reform has to be regarded as a ceiling and not a floor.
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