While I’ve heard many people voicing the same old concerns about personal accounts since they were first conceived, I always kept faith that once it came down to designing the fine print, the government would do everything it could do create a system which worked. But as the legislative process has moved on apace over the past year, I’ve started to feel that the creators have lost sight of their goal and are now in real danger of wasting a once-in-a-generation opportunity to reshape pension saving for the better.
The goal that everyone set out with was to find a way of getting the vast majority of British citizens to start saving more – a goal that would ensure that everyone had enough money to live the life they wanted in retirement, and would also help to take the burden off the state in years to come.
In that context, Lord Turner’s suggestion of auto-enrolment seemed a perfectly reasonable one. His lengthy report concluded that people would need a helping hand if they were to start saving more, and while full compulsion was deemed politically unpalatable, auto-enrolment was thought likely to be encouragement enough.
The two main problems that this threw up, however, were how auto-enrolment would sit alongside the current means-testing system, and how small employers, who currently didn’t offer a pension scheme, would fit into the mix.
To deal with all those companies who did not already have a pension scheme, Turner and his colleagues cooked up the idea of personal accounts – a national pension scheme which would serve all employees who did not have access to a company scheme. What was made clear from the start, however, was that this national scheme was not supposed to compete with existing company schemes – many of which were offering their employees much better terms than personal accounts ever would.
When it came to drafting the small print, however, the Government lost sight of this – setting the bar too high for existing schemes to carry on as they are. As a result, bureaucracy and expense now look certain to drive many employers to ditch their generous pension provision, and to leave their employees to roll into personal accounts .
This, unfortunately, exacerbates the second problem with auto-enrolment. For people to stay enrolled in a pension, they need to be sure that for every 1 saved, they’ll be at least 1 better off in retirement. However, under the current means-testing system, anyone earning less than around 40,000 will not have that certainty.
This alone will be enough to ensure personal accounts fail. When they come into force into 2012, journalists like myself will write articles advising our readers to opt out of their schemes if there’s any chance that they won’t be better off in retirement. Once word gets around, more people than not will be opting out of their pension scheme, rendering the whole exercise a complete failure.
In short, the current pensions reform program has turned into a complete disaster – and needs to be stopped and rethought before the current Bill is sworn in. Shadow work and pensions minister Chris Grayling has started to become more vocal, but I believe that the Tories need to put this at the top of their agenda to stop it getting any further through the legislative process.
Meaningful pensions reform cannot be carried out without a wholesale redesign of the state pension system. And if the current legislative agenda is allowed to pass without looking at this crucial side of the equation, billions will be wasted on a scheme that can only ever fail.
James Daley is personal finance editor of the Independ