Ross Kent: Taxman scares many from saving for retirement

COMMENT

A Herald editorial was right to highlight the advantages of saving for retirement through workplace schemes. These include deduction at source being a painless way of saving, evidence that workplace schemes increase saving, the savings being allocated to retirement and the lower individual fees with the scale of a workplace scheme.

Despite these advantages, the proportion of the workforce covered by workplace savings schemes has eroded to 14 per cent over the past 15 years. Clearly, negative factors - particularly from the employers' perspective - have outweighed the positives.

But I disagree that cost and complexity remain significant negative factors. Workplace scheme providers have responded to the greater legislative complexity and cost sensitivities of employers by developing master trusts that address the main problems raised by the editorial.

Employer responsibilities under a master trust can be summarised as:

* Doing some thinking at scheme start-up about what sort of benefit and contribution design is appropriate for their workforce.

* Making sure contributions are forwarded to the manager, and new entrants and exits to and from the scheme are advised to the scheme manager.

Individual employer schemes, where the employer is responsible for management and trustee responsibilities, remain an important pillar of the superannuation landscape. But for employers considering the establishment of a new scheme they are pretty much things of the past.

Transfer between schemes is not difficult. While individual employer scheme designs differ, when employment ceases under AMP's master trust, members can keep their funds in the scheme or, if a new employer has a scheme, transfer their funds to their new employer's scheme.

Of course, when employment stops this is typically the first time that the scheme member has access to their funds. Unsurprisingly, most find more pressing demands for these funds than keeping them for retirement.

While perceived cost and complexity may not be genuine reasons preventing an employer setting up a such a scheme, relatively few employers see a good reason to establish one.

This is despite scheme managers providing through master trusts workplace schemes that are low cost, simple to run and with the features that allow members to maintain their retirement savings until retirement, if they like.

Of course for employer schemes to be effective they also need to be attractive for employees to join. Employers typically use an employer contribution to attract and retain staff by vesting entitlement to those contributions over a number of years - for example, full entitlement to employer contributions may be after three or five years of company service.

While the length of the vesting period needs to be relevant to the particular employer's circumstances, reducing vesting periods for employer contributions could be one way to make schemes more attractive for employees.

But it is clear that more than tinkering is needed to shift employers' attitudes to supporting workplace schemes. This brings me to the editorial's final point on tax. The present taxation of retirement savings hides big disincentives to long-term saving.

The tax system is extremely harsh on retirement income. It taxes accumulating savings over long periods as if they were current income. This means they are taxed as they accumulate at the top personal rate.

It does not recognise that retirement income is paid in retirement when earned income is nil. It is encouraging that the Government has given the Savings Product Working Group, which is looking into encouraging work-based saving, a mandate to consider tax-generated disincentives.

In summary, employer superannuation providers have responded to the demands of a voluntary savings regime by providing schemes (master trusts) that are low cost, are easy to establish and which require minimal ongoing employer supervision.

There is always scope for improvement - for example, portability and the ability to transfer between schemes. But the stark truth is that membership of workplace schemes has continued to decline for more than a decade. It is going to take more than marginal changes to reverse this trend.

The obvious place to start is to look at the heavy taxation of retirement savings.

* Ross Kent is the managing director of AMP Financial Services. He is responding to a Herald editorial which said that reducing complexity and cost, and guaranteeing ease of access, were the recipe for popularising work-based saving schemes, not tax incentives.