The top-up pension scheme rather than a revolution in pension provision claimed by the government appears as more a case of talking about pension provision rather than actual pension provision writes Susan Pashkoff. While the scheme is claimed to be geared towards those with lower incomes, the amount gained by participating is minimal and also offers no guaranteed pension at the end of the process.
The introduction of a pension scheme means, in reality, getting workers to put aside some of their current consumption to save for future consumption. People who are poor are poor by definition; their current income is already extremely low and it is extremely difficult for them to save for a pension as it literally means going without things that they need currently. Moreover, people are already facing reduced current income due to the transformation of the workplace from one in which long-term jobs for life providing higher and secure income over time are being turned into shorter-termed or temporary jobs, part-time jobs, and sub-contracting. Government benefit and tax credit reductions mean that the incomes of the working poor, working class, and middle class are already being cut. Rising prices of food, energy and transport (both public and private due to rising petrol prices) make it even harder to defer current consumption for the working poor this pension scheme is supposedly geared toward . In any case, temporary workers whose contract is shorter than three months are ineligible and the minimum income threshold of £8,105 already excludes many in part-time employment. Government plans to further encourage the creation of flexible labour markets mean that the employment situation of those already in low-paid unskilled jobs is getting more precarious. Making it automatic for them to save a little bit is neither here nor there and given that a number of benefits for the elderly are already means-tested (e.g. housing benefits) or are scheduled to become so (e.g., winter fuel allowance), it just may be enough to disqualify people from receiving those benefits.
Run by private pension managers and investors
Second, especially for people that do not have much, some certainty about the outcome is important. To get the working poor and lower earners of the working class to put aside current consumption, there must be a defined benefit offered. Rather than providing a national system independent from the stock market this system is inherently set up to benefit private pension and investment firms. The type of pension being offered is not the type of pension that those with lower incomes need. The top-up pension scheme is a defined contribution scheme run by private pension managers and investors. As such, what you obtain when you retire is dependent upon the vagaries of already unstable finance markets, rather than granting guaranteed pension incomes like that of defined benefit and final payment schemes. Getting people to save with no guaranteed income at the end of the process is not a compelling argument to convince those on lower incomes to give up current consumption for a future imprecise income. Essentially, what this scheme is doing is taking desperately needed current income from those that do not have much to spare which is then being used to fuel the speculative investment of financial markets. The inability to remove your “savings” from the scheme means that in the case of unemployment, you cannot access your own money. Moreover, unlike the wealthy that can shift their savings to and from different sorts of assets in the case of a crash, the working poor are unable to touch their money. A more coherent scheme for the working poor would be strengthening the current state pensions system so that people can actually have a state pension ensuring a decent standard of life when they retire.
Third, even if you accept the defined contribution approach, this type of pension will not be especially helpful due to fact that the minimum contributions from employers are too low (ranging from 1% of your income to 3% in 2018 as compared to that ranging from 3% to 8% for employees). The burden of saving for a pension rather than being a shared contribution between employee and employer and hence as part of a longer termed life-time wage contract is primarily falling on employees. This is partially due to the fact that life-time wage contracts are being phased out, but it is also due to attempts to minimise costs for employers leading to rising prices. Reducing current wages rather than profits is how they have chosen to pass costs incurred by the introduction of the pensions along. Adding insult to injury, fees are rather high. Part of your pension contribution is being (irrespective of the performance of the fund and private pension managers) deducted from the amount of contributions to pay 1.8% start-up fees and a 0.3% annual management fee is also being deducted from the accumulated total which goes right into the pockets of pension fund administrators.
While the government compares the new scheme to that in New Zealand, there are significant differences. New Zealand has a national scheme which is not employer or occupation dependent; you pay into a national fund which can be easily added to irrespective of your job. In the UK top-up scheme there is something similar for self-employed workers (increasingly important given movement towards sub-contracting) and for those whose employers do not offer pension schemes; a National Employment Savings Trust (NEST) scheme in which you can contribute a maximum of £4000 has been established. However, for workers whose employers either offer a defined contribution scheme or will be forced to offer one, the current set-up of the UK scheme means that employers can choose between available options meeting certain requirements. As such, since portable pensions between employments are not being required, workers shifting from job to job may end up with various small pensions scattered from employment to employment.
On average, this is not the most helpful pension scheme for the working poor. In fact, it is the wrong system. Instead, what would be useful in encouraging savings is a coherent state pension scheme ensuring a decent standard of living. Ploughing the money of the working poor into the stock market is not what is needed; a decent guaranteed standard of living for those working people of all ages is necessary.