UK/AUSTRALIA/US - The Trades Union Congress has warned the Government against copying "failed" American attempts to improve the pension system.
Instead, the union is urging ministers to adopt the more “successful” Australian compulsory contribution model.
'Lessons from 401(K) plans', a TUC briefing published today, claims that the US 401(K) pension has failed to promote savings despite the tax incentives it offers employers.
401(k) plans are voluntary retirement plans that some US companies extend to their employees. It allows a certain percentage of the employee's pretax pay to be directly invested into the retirement plan. The funds and the growth are not taxed until the funds are withdrawn.
But the TUC argues that occupational pension coverage in the US has not risen above 50% - similar to the UK - since the schemes were introduced 20 years ago because employers have simply closed final salary pensions and forced employees into “far riskier” 401(k)s.
401(k) assets can be reinvested into the company’s own stock - the dire consequences of which were made apparent following high profile corporate collapses, such as Enron, which burnt millions in pension fund money.
“The failure of 401(K) plans to boost pension saving in the US shows that minor incentives will not generate the saving increase the UK pension system needs,” said the TUC.
Instead, the union is pushing the government to introduce a compulsory system similar to the Australian model in which employers would contribute 10% of pay, if necessary phased in through a strict timetable starting at 4%. Employers would then get the authority to ensure workers, who can afford to, join occupational schemes.
Australia phased in compulsory employer contributions up to 9% over ten years, resulting in around 90% pension coverage.
TUC deputy general secretary, Brendan Barber, said: The gulf between retirement saving in the US and UK, and Australia, should convince us to go down under on pensions, not West.
The financial incentives for employers in the 401(K) plans have not increased pension take-up in the US. In fact the scheme has encouraged American employers to replace secure final salary schemes with risky plans that are heavily invested in employers' shares.
US pensions are in no better state than the UK's and are certainly no model for the radical reform our system needs. The Australian system shows that what works is compelling employers to contribute to pensions and letting them make their staff join schemes.
The TUC’s briefing follows comments made last week by the UK secretary of state for work and pensions, Andrew Smith, that employer compulsion and a rise in the retirement age will not feature in the Government’s impending green paper.
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