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Personal effects

During the early part of this important year for pensions, much was made by the Government of the New Zealand Kiwi-Saver initiative.

This interest clearly shaped our legislators’ views on pensions as we are now contemplating the idea of auto-enrolment for our own BritSaver version of this Antipodean phenomenon in the form of the pension personal accounts that the White Paper is putting in place for us (personal accounts are also sometimes referred to as the National Pension Savings Scheme – a prototype name used in their early development).

Whatever the BritSaver is called the idea is that people will be auto-enrolled into the resulting personal accounts if they are not already in a proper pension scheme.

Auto-enrolment is seen as a better way of getting people to save than simply putting a pension scheme in place and inviting people to voluntarily join it. That was Plan A in the UK, if you remember, and basically that is how we ended up with 300,000 stakeholder pension schemes with nobody in them. Plan B – personal accounts – will not make that mistake. People will be put into them whether they like it or not and it will be up to them to leave if they do not want to be members.

In New Zealand, however, 75 per cent of the people who have been auto-enrolled in this way have opted out of the KiwiSaver, even though it has been built on top of a more generous state pension system than is being proposed for the UK.

In New Zealand, only 5 per cent of those retiring are likely to become eligible for means-tested benefits as the underlying state pension is set at a level of 33 per cent of national average earnings (in the UK that would equate to an annual old-age pension of over 8,800 a year or 170 a week).

In the UK right now, the basic state pension only amounts to 84 a week and only that much for those who qualify for the full amount. Many men and most women do not get the full amount. Means-tested benefits fill this very big gap for those who are savvy enough to know how to claim them.

The White Paper proposals on the table over here will, according to the Pensions Policy Institute, mean that as many as 90 per cent of individuals over state pension age in 2050 will have less than the 135 a week (in today’s terms) that the Government has in mind. For single pensioners, this income level would be low enough to qualify for pension credit in the absence of any other income. The PPI’s conclusion is interesting and as follows:

“There is a low and uncertain level of state pension that may reach 27 per cent of NAE for some people at state pension age but for the majority is lower unless they claim means-tested benefits, which not everybody does. But the private pension saving on top is voluntary (through auto-enrolment) so that cannot ensure adequacy either. Personal accounts would therefore have to make up for inadequacies in state provision as well as aiming to provide an income replacement.”

To me that says we are heading for the worst of all possible outcomes from this so-called reform that is going through our legislative process. If the Government goes ahead with its proposals and the Pensions Policy Institute’s analysis is correct, then many of those likely to be swept into saving by auto-enrolment will end up buying little other than privatised welfare. This can surely only happen if people really do not understand what is going on or the low-paid genuinely do want to pay more taxes so much that they will be prepared to do so voluntarily.

Worst of all, we will still be a million miles from having a system where every pound saved makes savers at least 1 better off than non-savers, a minimum requirement for anybody contemplating voluntary saving, whether induced by auto-enrolment or advised action.

Steve Bee is head of pensions strategy at Scottish Life

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