The ABI (Association of British Insurers) is proposing a radical new measure to encourage people to save for retirement. The Pension Contribution Tax Credit (PCTC) will enable employers to contribute £100 to an employees' pension scheme at a cost of less than £60, compared to the £80 cost under the current regime.

This proposal is outlined in 'Closing the Savings Gap - Carrots or Sticks'1, an ABI paper which debates the pros and cons of many of the ideas that have been put forward on compulsion and incentives in the pensions market.

The ABI claims that PCTC is a practical, workable proposal that provides an additional incentive to employers to contribute to employee pensions, while limiting the financial burden on either the taxpayer or the employer. The ABI estimates that this scheme could reduce the annual savings gap by £2.8billion.

One advantage of the PCTC is that it could be targeted at smaller companies who are currently the least likely to make contributions on behalf of their employees.

By incentivising employer contributions, this concept aims to mobilise the 'drag' effect that was seen with the recent launch of stakeholder pensions. Increasing the number of employer-sponsored schemes appears to increase the level of employee contributions.

Mary Francis, Director General of the ABI, said: "The Government wants to hear good ideas about how we can encourage more people to save more for their old age. Many people are much happier to do so when they see that their employer chips in as well. This Pensions Contributions Tax Credit is a cost-effective way of encouraging employers to do so.

"We have not discounted the idea of compulsion, but our first priority must be to look for ways to encourage people to save more on a voluntary basis. This is an incentive that is easy to implement and will bring about change in a cost effective way."

Additional contributions to save for retirement, whilst significant, are not the only solution to closing the savings gap. When combined with other ABI proposals, the overall impact on the savings gap could be far greater.

The ABI is also suggesting other measures to encourage saving:

• Allow employers to make scheme membership a condition of employment, with the proviso that employees can opt-out if they make adequate, alternative, provision.
• Allow employers to do more to promote the benefits of their pension arrangements, especially where there is an unconditional employer contribution.
• Address, as a matter of urgency, the position of the self-employed, who remain under pensioned as a group. A sensible starting point would be to require the self-employed to contribute to the State Second Pension (S2P), perhaps introducing this requirement at the point at which S2P becomes a flat-rate benefit.