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Means-test could scupper NPSS

Pension personal accounts risk becoming a “disastrous failure” unless the Government scales down means-testing and removes doubts over the scheme, says LibDem Shadow Work and Pensions Secretary David Laws.

He says the issue of means-testing is his main concern because it has the potential to wipe out the benefit of employer contributions and make the scheme unattractive to many of the target audience.

Laws says he wants access to Department for Work and Pensions’ figures on future means-testing levels to stress-test the numbers by using different assumptions. But he says even if the DWP’s projections are correct, means-testing could still sink the scheme.

Work and Pensions Secretary John Hutton has claimed the way that saving credit will be structured ensuresmost people eligible for means-testing will still have an incentive to save.

But Laws says this is not enough as a significant number of the target group for personal accounts will lose a large amount of the gain to be had from the employer contribution due to means-testing.

He claims this could result in employers arguing that any contribution they make to the employee’s pension will just offset the effect of means-testing and persuade many to opt out.

He says the Government is obsessed with getting to a position where nobody will be worse off by going into the scheme but this is a soft test in terms of the questions those on low incomes will be asking.

Laws says: “There is huge doubt on whether the NPSS can work. If things go wrong and the participation rate is low due to means-testing, it could make the difference between the whole thing being a success and a disastrous failure.”

He believes work should be done to make pension personal accounts as flexible as possible in terms of drawdown facilities and linking with other savings plans although difficulties around the treatment of tax relief would need to be ironed out.

Laws says if evidence is uncovered to suggest that Chancellor Gordon Brown was forewarned about the effect of removing advanced corporation tax relief, it would further question Brown’s interest and commitment to private pensions and highlight the Treasury’s culture of secrecy.

But Laws points to evidence from the Pensions Policy Institute that removing the tax relief had minimal effect on pensions compared with falling equity markets and rising longevity and describes it as a backward-looking issue.

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