The esteemed Toby Nangle flagged to me an article of his the FT published today. I think he had been reading a blog of mine which questioned whether the implementation of the 2017 AE reforms right now was a good idea.

Toby thinks differently as is pretty clear from this article

Mandating an increase to minimum employer contributions would help address the looming pension crisis. And as policymakers in Canada, Denmark and Australia have shown, it could also help achieve other economic goals.

Of course in Britain , we do not mandate employees to make pension contributions, that would be “unreasonable force”. Instead we mandate employers to pay 3% of a slice of earnings into a savings pot and leave it to savers to “opt out”, which one in ten do.

Australia is slowly boiling its frog – putting up the mandated employer contribution , half a percent a year till it reaches 12%. I imagine we will start doing this too and will get to 12% around the end of the decade, albeit with 5% of the money coming from people’s pay and the tax they didn’t pay on earnings.

So we really only have to be patient to see the pension reform of the Danes, the Canadians and the Australians materialise. The low wage increases we saw in the middle of the last decade were to some extent compensated by employer contributions to people’s pensions and it’s worth noting that there are many more (12m) savers right now than ever saved into a DB plan. Workplace pensions cannot be exclusive, they include most workers, only the self-employed escape the net.

Which is a rather long way of asking what Toby thinks the Government should be doing which it isn’t doing. Ramping AE rates up in addition to widening the band to include earnings from £1, is not frog-boiling, it’s a swingeing payroll tax that would hit the poorest hardest (many of them are still being over-charged for contributions because of the net-pay system that won’t start being unwound till the middle of 2025.

We are asked to consider our economic growth transformed by an increase in mandated contributions

A larger stock of pension savings would increase the pool of capital available for investment in the UK and beyond. It would not only reduce the cost of domestic risk capital with associated productivity benefits, but also improve the country’s balance of payments.

But what are we to make of the USA , where productivity and markets are  booming (see Toby’s excellent analysis also in today’s FT)

It is not just countries with mandated funded pension systems that are doing well, the growth and economic returns from the constituent elements of the MSCI are too widely dispersed to draw much of a conclusion (other than we should diversify)

So I’m not buying the macro economic argument for a mandated pension system.

And I’m not buying the decline in unions for Britain’s low productivity and relatively low market performance.  The DB culture in the UK has only been a mass market phenomenon in the public sector. In the private sector, membership of a DB pension was often a privilege not a right and large swathes of British industry did not have blue collar schemes, reserving DB provision for the executives and white collar staff. There were offsets which discriminated the low-paid and where blue collar arrangements were in place, they offered lower accrual and due to life expectancy – shorter pension payments

Only in the quasi Government schemes (the BP, BT. BA etc) were pensions less than exclusive.

Auto-enrolment does at least offer someone for everyone , even if pension contributions are still skewed towards the male graduates and away from part timers and those on minimum wage (too often women and those socially disadvantaged).

What unions have done, and this over successive right-wing Governments is to radically improve the state pension promise to a point where pensioner poverty has seriously declined.  Would we have lost the triple lock if not for union pressure, I suspect so.

We are out of the era of “alright Jack” where with a “helluva shout, it’s an out brothers out“, productivity and growth are mantra of the left as well as the right.

The Government are for once right on pensions

We can look at Canada and Australia and Denmark as much as we like but I do not think they offer us the answer to our current problem – a lack of growth in the economy to support better wages and pensions (rightly described by Toby as deferred pay).

The implementation of the AE reforms is not going to make a radical difference, the proper investment of some of the £2.5 trillion in funded pensions might do.

The Government (with the general support of the Shadow Cabinet), is prioritising the right things, we have (despite a disastrous 2022) £2.5trn in the big pot and that money dwarfs the current cashflows into the system.

What is critical is we get this money to work for the UK economy whether in Cornwall or the Orkneys, whether in listed or unlisted stocks, we need long term capital which businesses can use to invest in long-term projects delivering sustainable gains in productivity.

I don’t see short term loans to companies as doing the trick. We have plenty of debt being  exchanged for gilt and equity by insurers backing annuities, we don’t need more of the stuff in our funded DB and DC pensions!

Toby reminds us as he concludes his article

… lifting the minimum employer contribution rate would make the pension system work for all. It could also improve the UK’s balance of payments and moderate wage inflation.

That’s a big ask for a very serious tax on worker’s cashflows.