Lack of information goods - Pensions

A market can only work efficiently if both sides of the market (buyers and sellers) have all the information they need. Therefore a common market failure is where one side of the market has insufficient information or places too little value on that information.

Pensions are an excellent example. Many people do not save enough for retirement because they do not fully understand the benefits. This makes them look on pensions as too expensive and they decide not to 'consume' that service.

The problem with pensions is that the benefits are a long way into the future when you are in your 20's. When you realise that you need a pension it is too late to build up one you are satisfied with.

So the solution is to make pensions more attractive. Until now the government has given a tax incentive to those contributing to pension schemes. All contributions are 'tax free' saving 20% of the cost and up to 40% for higher rate tax payers.

Despite this generous incentive the number of people in private pension schemes has dropped below 3 million for the first time. (There are around 5 million in public sector schemes.) With 29 million people in work this means around 21 million workers in the UK have no private pension.

Of course the state will pay everyone an old age pension and there is a state earnings related pension, but this may not be enough to let people live comfortably. If that happens the government will end up paying out more benefits in other forms and with an ageing population they can't afford that.

So a new scheme is being introduced. All employers will have to offer a workplace pension and all workers will have to opt out of their workplace schemes. It is hoped that the effort of having to do so will mean many people will get a private pension by default.

This is an example of regulation and looks like being more successful than the market solution of tax rebates (although that remains too).

The Independent reports the scheme here