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Make or break

Whether pension reform succeeds or fails will be measured mainly by how many people opt out of automatic enrolment. However good the legislation and the compliance getting employers to carry out their duties, it all boils down to whether people remain an active member of a pension scheme and save for their retirement. It is fundamental that we get the culture surrounding saving spot on.

The DWP is working hard to put together a comprehensive communications campaign up to and beyond 2012, the date set for automatic enrolment. But first it needs to tackle the issue of means-testing in retirement.

At the start of February, the DWP published analysis showing that, even taking inflation into account, 95 per cent of people will benefit from auto-enrolment. They would get back an amount that was more than their original contributions, with over 75 per cent expected to get more than twice what they had put in.

Some, however, would lose out – those with “extremely limited” entitlement to the state pension and people renting in retirement, who have potential housing benefit.

I strongly believe it is in the best interests of most people to save for their retirement. This report is useful. It should help the Government, industry and media to get behind the savings message, especially as the 2012 reforms approach. It is also helpful to be clear on the small group who will not benefit.

With the introduction of automatic enrolment, we have a fantastic opportunity to educate people on the value of saving for their retirement. People need to be reassured that saving is the right action to take and that they will not be penalised for it in future. For most people who have the benefit of an employer contribution, this will be the case.

But there is more at play here. While it is important to consider the numerical modelling that the DWP has produced, people should not base their decisions solely on the figures, as the underlying assumptions used might not be relevant to their circumstances. It may also be difficult for some people to figure out whether it personally pays for them to save or they may be concerned that the benefit of saving looks small compared with the benefit of spending today.

If this is the case, and I think it is, then there is more that the industry and the Government need to do to convince people that it pays to save.

First, we need to simplify the way that the benefit system interacts with saving to make it easier for people to understand and if possible to reduce the number who lose out.

We need to investigate the ways we can make those smaller benefits bigger and to reassure people that it really is in their interests to sacrifice their consumption today. Some of the answers may lie in pension disregard or in increasing the trivial commutation limit.

Finally, we need to provide help, information, guidance and advice to people trying to navigate their way through this maze.

They need this information in their hand when they make that all-important decision about whether to opt out of their employer’s scheme.

If the industry and the Government can achieve this, we can put the means-testing argument to bed. If we cannot do this, then means-testing threatens to derail the introduction of automatic enrolment into pensions.

Rachel Vahey is head of pensions development at Aegon

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