I always doubted the success of child trust funds and whether they would enc-ourage a nation of savers as Gordon Brown intended.
“The child trust fund is designed to ensure every child has assets and wealth and that no child is left out,” he boasted when they were launched. Yet I bet many 18-year-olds are likely to fritter their CTF pot away on a holiday of a lifetime before they adjust to the realities of working life.
It is not just 18-year-olds who wouldn’t mind a small lump sum to have some fun with either. Ask a 20-something worker whether they would rather have a few hundred pounds in their hands today or leave it invested in a pension fund that they can have in 40 years and I reckon they will bite your hand off for the cash almost every time.
Which is why auto-enrolment needs to be a success. It was Lord Turner who argued that auto-enrolment was the best route to get Britain’s workers to save for their retirement. “Get people to opt in and they won’t, allow them to opt out and they won’t bother,” he said. I am not convinced.
Let’s face it, efforts by the Government and the financial services industry to get people to save have failed miserably. Doubts have to be cast on whether the voluntary approach will ever work.
Survey after survey shows that workers are not bothering to save. The Prudential is the latest to publish a report to suggest as much. Its research shows that around 15 million people will have to rely on the state pension or personal savings when they retire.
The Pru survey came off the back of a warning from the Workplace Retirement Income Commission that up to 14 million workers will retire with pensions far smaller than those enjoyed by their parents.
And now we learn that pensions minister Steve Webb is facing opposition on his plans to end short-service refunds for trust-based DC schemes.
Opponents, including the NAPF, argue that a ban will cause an administrative and costly headache.
The NAPF goes as far as saying that getting rid of short-service refunds is “one of the biggest long-term risks facing pension saving”. Why? Because many trust-based schemes that will not be able to recover lost money when workers move on will consider moving to a contract-based scheme, thereby endangering members by removing vital governance.
But it seems that the industry is in danger of ignoring the very people auto-enrolment is expected to save from an impoverished older age. Research may suggest that the amount refunded at present is relatively small but auto-enrolment will put far more workers in a pension scheme than ever before. It reminds me of stakeholder pensions, when insurers seemed to care more for their bottom line than getting Britain out of a pension hole.
Around 20 per cent of workers in their 20s move jobs. It is not unreasonable to believe that many workers will be on their second or third employer by the time they reach 30.
If that is the case, they could be in a situation where they are only just starting to save for their retirement because they have taken the cash and ran each time they were offered it.
Such behaviour will mean workers will be playing catch-up before they have started.
If (and it is a big if) auto-enrolment is going to work, it must have everything in its favour. Yet allowing short-service refunds will undermine the very concept expected to get people to save for the long term in the first place.
Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing