Can compulsory retirement funding preservation work?

Back in the 1970s, indications from the government that compulsory preservation may be introduced resulted in widespread riots and general opposition from workers. At the time it is possible that part of the reaction may well have been due to a lack of trust in the retirement fund movement as a whole, considering that in those days there were no member trustees and generally little transparency surrounding funds.

The threat of hard times

However, it was also quite clearly put forward that there is little point in storing up funds for one's eventual retirement when hard times may threaten one's home or even the provision of food for the family in the interim.

Now there are again moves afoot to institute some form of compulsory preservation. But will it work this time and is government intervention the right solution?

On the one hand, one might sympathise with the authorities, who are seeking to alleviate the burden of looking after the aged on the state. Tax incentives are meant to promote more saving, but are of little effect on lower-income earners, while limitations on the access to capital (at least up to age 55) are perhaps largely ineffectual because they can be circumvented by early withdrawal, even though this may well be accompanied by even more hardship if it proves difficult to find alternative employment.

Tax penalties on withdrawal probably do little to deter someone in financial distress and may indeed simply magnify the problem in many cases by reducing the available cash. And then one has to accept that, if someone falls on hard times and is not able to access retirement savings as a "bridge", it could be that the government may have to provide financial support in some form anyway.

The "nanny state"?

On the other hand, critics will raise the issue of a "nanny state" in which the government seeks to rule the lives of its citizens rather than letting them act as they see best, given the circumstances in which they find themselves. After all, people are ingenuous and will usually come up with a plan to circumvent whatever legislation is put in place "for their own good" if in a corner.

A direct move to enforce compulsory preservation is likely to meet with some considerable resistance, while it could also lead to employees putting further pressure on employers to do away with compulsory retirement funds, thereby having the opposite effect to the desired outcome.

A compulsory state scheme with forced preservation would seem to be a relatively simple answer to this, provided it is structured, implemented and managed properly. However, it is possible that this may have the effect of "lulling people into complacency" on the basis of a belief that the compulsory scheme will provide adequately for retirement, whereas this is hardly likely to be achievable. In addition, should the move end up putting pressure on intermediaries who, no doubt, currently play a huge role in promoting the level of retirement saving, this scenario seems even more likely.

In any event, even if it is possible to ensure that people have sufficient savings at retirement, one then has to face the challenge of trying to educate older people who have never had the responsibility of managing their finances before, to arrange their affairs suitably in retirement. Surely this suggests that the answer lies more in building their understanding of finances - again an important function of the intermediary for which little recognition is granted.