Of course, auto-enrolment brings other problems, namely, will all those who are auto-enrolled benefit from being in the pension plan, whether it is a GPPP, an employer’s occupational scheme or a personal acc-ount? Will they benefit from personal saving when they could spend their income now and rely on the state for their retirement through means-tested benefits? Should low-earning employees opt out of whatever pension arrangement is offered to them? Auto-enrolment does not mean compulsion.
Undoubtedly, some employees will opt out simply because they cannot afford to pay contributions even though it means forgoing tax relief and the benefit of the employer’s contributions (3 per cent of a band of their earnings). These employees would rather have a pay rise now but that option is not available to them. Should advisers walk away from advising low earners who might face this dilemma?
Ideally, pensioners would not have to rely on means-tested benefits or at least not to the same extent. For this to be achievable, higher state pensions would have to be paid on a universal basis. Or pensioners would be able to build up a reasonable pension pot and still get means-tested benefits. However, both options are considered to be asking too much of taxpayers and so we are left with the current system.
The Pensions Policy Insti-tute has analysed the effec-tive returns that different individuals could get from saving in a personal account to establish whether people who are auto-enrolled may end up at retirement little or no better off from their saving as a result of the interaction of pension savings and means-tested benefits.
Their research says although the proposed reforms to state and private pensions will increase savings in a pension, the savings may not be suitable for some groups. This includes people who are likely to rent accommodation in retirement (they may be eligible for housing benefit) and some low earners in their forties and fifties who have not yet started saving.
The impact of personal savings and means-tested benefits has become a significant issue in the past few years, especially from the viewpoint of advisers who have to make recommendations to potential savers. The Government says it will set up a pensions savings incentives work programme that will report by the end of 2008.
The programme will lead to a shared understanding of the evidence on financial incentives to save for retirement and will assess the potential costs, benefits and other impacts of measures that could affect incentives to save for retirement.
An obvious question is, how reasonable is it to assume that the benefits that means testing generate now will still be available in the future? Some people who are within, say, five to 10 years of retirement may realistically expect that their employment prospects are extremely limited and that their earnings are unlikely to increase much as they approach retirement.
They may also be confident in betting that means-tested benefits will still be available when they retire so when they are auto-enrolled, they may decline the offer of membership and opt out.
But what about employees who are further off retirement? Surely it would be dangerous to make similar predictions about their own levels of earnings and about means-tested benefits?
Hopefully, they will heed the words of Pensions Reform Minister Mike O’Brien at the PMI spring conference when he said “betting pension credit will still be around in 20 years is not a guarantee at all”.
Tony Reardon is principal at Reardon Consulting