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Private lessons

When we look back in 2017, how will we decide if pen-sion reform was successful or not? Some may think it is only successful if 100 per cent of employers comply with their new pension respon- sibilities, others will be satisfied if 75 per cent comply. Some may deem it a success if it creates seven million new savers, others would disagree if that meant a further five million save less than they did before because employers level down their contributions to existing schemes.

For me, pension reform success is defined as more people saving more money than before. Automatic enrolment and mandatory employer contributions will take us a long way down the road but they can only achieve so much. We cannot forget this is a policy built on inertia.

A thriving private pension market has a big part to play in the overall success of pension reform. We need personal accounts as part of the solution. The current pension market cannot economically serve all employers who need to set up new schemes for their work force. But personal accounts will not provide all the answers to all employers and nor should it try to do so.

A private pension market can serve two useful purposes. First, it can take the bare bones of automatic enrolment and employer contributions up to the next level. With the help of advice, the market works with and creates engaged employers. Employers who are committed to the idea of pensions and the benefits they bring. Engaged employers can help to create engaged workers.

The private pension market can help to increase contributions beyond the qualifying earnings benchmark and offer choice to employers and employees to help them tailor their investments to their situation and appetite for risk. Often, workplace pensions offer additional benefits such as life cover and incapacity benefit.

The other role the existing market can play is competition for the personal accounts scheme which could lead to the development of innovative solutions in admin, investment and communications, creating a better environment for all.

But the Government and the FSA need to take action to maintain and promote a thriving private pension market by making sure the charging structure, shape and level chosen for personal accounts does not become an explicit benchmark. Private pensions will offer something different from personal accounts, including offering more benefits to employers and their workforce.

Pension reform offers opportunities for the private pension market but, to take advantage of these, the right financial conditions have to be created. Otherwise, the market will withdraw, leaving personal accounts centre stage. And although that might mean personal accounts get the right number of members to be called a success, the overall policy to get more people saving more money will fail.

Rachel Vahey is head of pensions development at Aegon

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