As of April 6, 2012, companies that don’t offer pension provision with an employer contribution will have to enrol employees into the new government-proposed Personal Pension Accounts scheme and be required to make a contribution, starting at 1% of ‘band earnings’ and rising to 3% in 2014. This isn’t a leap into the dark. A Strategy for Personal Accounts, a working paper delivered in 2007 by NFU Mutual, highlights the examples of: Sweden, which introduced a similar scheme in 1999; Australia, which has compulsory savings for employees and the self-employed; and New Zealand, which launched its own version in late 2007.
The Swedish scheme is funded by payroll taxes totalling 18.5%. Its pensions sector is dominated by the banks, which have nearly half of the market. In Australia, there isn’t even tax freedom on contributions; a lower tax rate of 15% is applied to income used as premiums for pension schemes. All employers have to pay into superannuation funds for their employees, the sole exception being for those on very low incomes. The ‘guarantee rate’ in 2007 was 9% and funds cannot be accessed until ‘preservation age’, between 55 and 60. New Zealand’s KiwiSaver scheme is something of a halfway house. The compulsion element is less than Sweden or Australia, a bit more than the UK’s current requirements, but a lot less than the 2012 proposals. Contributions of 4% of salary are automatically deducted on behalf of new employees, unless the individual opts out, and existing employees can opt in. On the other hand, consider the incentives: $1,000 on joining, $40 a year towards costs, tax relief on contributions and within the fund, and the possibility of releasing funds after three years to buy a first home. So the UK is very much in line with global trends in imposing compulsion on pension savings.
“In general terms, the ratio is 1:20,” says NFU Mutual’s Shelagh Hamer (below). “If you want £10,000 of income, you’ll need a fund of around £200,000.” While that depends on age at retirement, it’s a pretty good rule of thumb.