Squeezed and Opting Out of Pensions?

Ellen Kelleher of the FT reports, Squeezed Britons opt out of pensions:

Hundreds of thousands of Britons have taken a holiday from their personal pension contributions, in further proof of the severity with which household budgets have been squeezed by the economic downturn.

The latest data from HM Revenue & Customs show that contributions to personal and stakeholder pensions fell by more than £1bn in the 2009-10 tax year.

As many as 430,000 fewer UK residents put money away for retirement through these vehicles in the last tax period, a fall of 4.5 per cent, according to the Revenue’s estimates.

The decline in pension savings in the UK appears to be turning into a long-term trend. Since the 2007-08 tax year, as many as 730,000 fewer UK residents are putting money into personal and stakeholder pensions, while total pension contributions have dropped by more than £2bn, according to the Revenue’s data.

It showed that £18.2bn was contributed to private pensions, including personal pensions and stakeholders, in the 2009-10 financial year, down from £19.26bn during the previous 12 months.

Tom McPhail, head of pensions research with brokers Hargreaves Lansdown, attributed the shortfall to middle-class Britons’ tendency to favour short-term savings arrangements which have a more immediate impact on households’ bottom lines.

“When people are worried about job security, there’s a tendency to divert savings into shorter-term arrangements such as individual savings accounts, or to reduce mortgage debt,” Mr McPhail said.

Experts believe the losses underline the importance of the auto-enrolment rules, coming into force in 2012, which will see employers forced to pay into a private pension for their employees, or use the government’s new National Employment Savings Trust (Nest) pension scheme.

The minimum employer contribution will be 3 per cent of salary and employees will be enrolled once they earn about £7,500 a year – though they will pay contributions on earnings above roughly £5,700. Staff will put in a minimum of 4 per cent of pay up to a maximum salary of £33,500 in 2006 prices. Tax relief will add 1 per cent.

Nest will have an annual cap on contributions of £3,600 a year, and a ban on transfers in and out – although the independent pensions review says the cap and the ban should go in a few years’ time.

All employers will have to offer a pension at least as good as Nest, or use the scheme. About 750,000 will have to provide a pension for the first time and are likely to take the latter option.

Meanwhile, here in Canada, Janet McFarland of the Globe & mail reports, Ontario report calls for boost to pensions:

Ontario’s recipe for improving Canada’s pension retirement system includes both modest improvements to the Canada Pension Plan and new pension innovations from the private sector, Finance Minister Dwight Duncan says in a new report.

The province issued a consultation paper Friday, asking for public input on proposals to improve pensions for Ontarians as part of a national initiative to find solutions to boost retirement incomes across Canada.

In a letter accompanying the report, Mr. Duncan continued to support a proposal he endorsed at a national finance minister’s meeting in June calling for an expansion of CPP benefits for Canadians. The proposal has faced opposition from Alberta and is expected to be debated again at a finance minister’s meeting in December.

“A modest enhancement to the CPP now would provide a significant benefit to these workers when they retire,” Mr. Duncan said. “I believe such an enhancement is affordable if contribution rates are phased in gradually, particularly in light of the over $8-billion in annual tax relief Ontario will be providing to businesses as part of its tax plan.”

The report does not back any specific model for achieving that goal, however, only outlining different options and asking for comment on the choices.

Currently, CPP benefits are structured to replace 25 per cent of an individual’s career average earnings up to an annual limit currently set at $47,200, although most retirees do not qualify for the maximum amount.

One reform option is to increase the maximum income replacement rate from 25 per cent currently to a higher rate, such as 35 per cent, the report said. Another option is to increase the maximum earnings ceiling, the report said, noting that a 50 per cent or 100 per cent increase would move it from $47,200 a year to $70,800 or $94,400.

The report also asks for comments on potential implementation issues with expanding the CPP, including how to phase in the increases and how extra money in the fund should be managed. It also questions whether an increase would have an impact on other retirement savings by inducing employers to reduce their pension benefits or inducing individuals to save less on their own.

Mr. Duncan also said governments should make regulatory changes that will provide better private-sector pension options.

In his letter accompanying the report, he said current rules only allow pension plans to be offered by an employer to an employee. This limits options for people who are self-employed or who work for small companies that cannot afford to offer a pension plan.

The report asks for input on proposals to allow financial institutions to offer pension plans with participation from multiple employers, allowing more companies to offer retirement benefits to workers and reducing administration costs by creating large pools of funds.

The report said one goal of such plans would be to allow individuals to hold their own accounts in the pension plans, so they could transfer them if they switch jobs. The money would also be portable nationally, the report suggested.

“By changing these laws, we can expand the range of institutions that can set up pension plans, and the range of people who can access them,” Mr. Duncan said.

The report also asked for comments for reforms to make it easier for companies to offer “target” benefit plans, which are similar to traditional defined benefit plans, but allow the employer to reduce payouts if the pension plan does not have sufficient assets to maintain coverage.

Employers and pension experts have argued such plans would be more flexible for sponsors and could be a solution to declining pension coverage in the private sector, where many traditional plans are being abandoned.

You can download Ontario's new report, Securing Our Retirement Future: Consulting with Ontarians on Canada's Retirement Income System. I think it's a step in the right direction, but much more needs to be done. What really worries me is what's going on in Britain, and how long before we see the same trends on this side of the Atlantic (probably already happening).