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Means to an end

I have got a bee in my bonnet about this means-testing malarkey. The DWP has published its report on the interaction of private pensions and means-testing – it is now time to move on.

A minority of people will lose out from means-testing. This is unfortunate but it is not the most important issue in pensions today. In fact, it would not even make my top 10. In focusing on this issue, at times to the exclusion of all else, some pension commentators risk doing a disservice to savers for two reasons.

First and most important, because for the vast majority of the population the only sensible course of action is to save as much money as they can for retirement and to start doing it as soon as possible.

Future Governments will be unwilling or unable to provide anything more than a very low level of welfare support and no one who can possibly avoid it will want to have to rely on the relatively meagre standard of living it will deliver.

Second, in attempting to pin down precisely who will be winners and losers in the future, there is a risk of losing sight of the fundamentally uncertain nature of any long- term savings strategy.

No investment is risk-free and those that carry a high degree of predictability typically offer very low returns. The Government cannot guarantee that everyone who is auto-enrolled into a pension will be a winner all the time, any more than any private savings institution can. The pension credit system itself is not immutable and it will undoubtedly evolve over time.

So why is anyone demanding a Government guarantee on this now? Why assume that simply because an auto-enrolment system is being introduced, that means it has to come with a cast- iron guarantee that no one will lose out?

People make financial decisions in the hope that they will be better off but they do not get the luxury of guarantees. Why should personal accounts be any different?

Governments default on debts (even the British government did although that was in 1672), pension schemes go bust, with- profits funds slash payouts, insurance companies sell poor value insurance contracts.

Governments cannot buck markets, they cannot resist the force of demographics. Half the time they cannot even balance their books competently. This Government recognises that future governments will not be able to afford the bill – partly because the taxpayer to pensioner ratio is changing for the worse and partly because this Government is furiously borrowing as much as it can from tomorrow before it gets booted out of office.

We used to celebrate our private pension system, recognising it as a key element in our overall welfare infrastructure. After a couple of decades of winding down pension provision and of butchering final-salary schemes, the Government is simply reversing a trend which many people deplored in the first place.

Yes, the Government is privatising the welfare system and, yes, it is imposing this burden on employers, whether they like it or not. It is also true that the 8 per cent funding rate may not be enough but rather than attempting to undermine the whole programme of reforms by carping about means-testing and inadequate savings rates, a more useful response would be to encourage higher levels of engagement and higher contribution rates.

Personal accounts, auto-enrolment and pension credit are a far from perfect system and no doubt further refinements can be made.

Notwithstanding the economy’s short-term need for expenditure to flow once more, the single most important pension consideration now and for the future is not to tinker at the edges of means-testing.

It is to persuade as many people as possible to take individual responsibility for their own retirement and to put aside savings to meet that need.

Tom McPhail is head of pensions research at Hargreaves Lansdown

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