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Reforms to solve pensions crisis By Rob Griffin
Government plans to guarantee everyone access to a workplace pension have sailed into a storm of controversy - even though they won't be implemented for another five years. Personal Accounts are to be introduced Tony Blair believes that such an overhaul is necessary to put in place a "sustainable, affordable and trusted" pensions system that meets the needs of the country and future generations. As well as improved incentives to save, he maintains that the accounts will result in a significant reduction in the charges faced by pension savers - which will mean larger final pension pots - and up to £5 billion worth of new savings. But not everyone is convinced that Personal Accounts are the answer. Critics claim that many people could be worse off, the system may prove to be bureaucratic and could even end up becoming a financial scandal. What's not in doubt is that the pensions system is in crisis. Experts estimate that only 40% are saving anything towards their retirement - even though 80% know they will need more than the basic state pension. How the Personal Accounts will work The question is whether the proposals will solve the problem. The overall idea is that every employee aged 22 and over, who is earning more than £5,000-a-year and not already contributing to a pension, will automatically be enrolled into one of these accounts from 2012. Employees will pay 4% of their earnings, between approximately £5,000 and £33,500-a-year. This will be matched by a 3% contribution from their employers and 1% tax relief on individual pension contributions. People can choose to opt out of the scheme, but they will be re-enrolled every three years in a bid to guard against apathy. John Hutton, Secretary of State for Work and Pensions, is adamant that the combination of mandatory employer contributions, tax relief and automatic enrolment will improve access to affordable, low-cost pension saving. An annual limit will restrict the level of contributions an individual can put into their account. This will be £10,000 in the first year and then £5,000 for subsequent years, this arrangement is scheduled to be reviewed again in 2020. Transfers in or out of existing pension schemes will not be allowed. Philip Hammond, the Shadow Work and Pensions Secretary, fears that Personal Accounts could lead to a "back-door nationalisation" of occupational pension provision. "Gordon Brown has already raided £100 billion from pension funds since 1997 and introduced a new stealth tax to prevent pension funds being passed onto children," he says. "Now we have yet another attack on occupational pension saving." The proposals received a guarded welcome from companies who appreciate the fact that the minimum employer contributions will be phased in over three years, starting at 1%. Mike Cherry, pensions spokesman for the Federation of Small Businesses, believes that it is a great opportunity to secure the future of pensions, but warns that the jobs of over half the private sector workforce are at risk if government gets it wrong. "Any new scheme must be affordable, easy to administer and introduced carefully to minimise the burden on businesses least able to cope with sudden increases in costs and administration," he says. The risks involved There is a risk that companies already offering significantly higher contributions in their own pension schemes may decide to reduce them, points out Tom McPhail, head of pensions research at Hargreaves Lansdown. Ros Altmann, a pensions expert, warns that consumers won't enjoy the same level of protection as they do with other financial products. "These new Personal Accounts are being defined as an occupational pension and not a personal pension," she explains. "So the Financial Services Authority won't be able to demand that people who lose money in years to come are paid compensation." David Laws, the Liberal Democrats' Shadow Work and Pensions Secretary, says that many people could actually end up losing money as a result of Personal Accounts because savings could lead to the withdrawal of other means-tested benefits. "These new accounts run the risk of mass government pensions mis-selling because the huge number of means-tested benefits which accompany them will lead to many people losing up to 85p of every pound they save," he says. The only answer, he believes, is giving people incentives to save. Regardless of their circumstances, people will need very clear information to help them decide whether or not to embrace these Personal Accounts, according to Niki Cleal, director of the Pensions Policy Institute. "Our analysis shows that young people are likely to get good effective rates of return if they contribute to their Personal Account throughout their working lives," she says. "However, some self-employed people or those who rent in retirement may be at higher risk of them being unsuitable." People shouldn't use the fact that these new accounts aren't due to come into force as a reason for not thinking about their pension planning, adds McPhail. "There are a lot of uncertainties at the moment so the most important message is people must not defer addressing their own pension plans until 2012," he says. "It's essential to get on with saving for retirement now."
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