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System failures

Steve Bee is not the only critic of the system of personal accounts being proposed by the Government but he is one of the most vociferous.

Scottish Life head of pensions strategy Bee says: “What you are doing, if you’re not careful as a Government, is your wasting an opportunity to fix the pension system for this generation.”

The problem, as always, is that of means testing. Bee is not alone in pointing out the drawbacks to means testing. Others, including Adair Turner and, most recently, the current Conservative work and pensions shadow Chris Grayling, have also pointed out the drawback but Bee presents the case against in stronger terms than most”Is this really the best they can do to come up with? A form of privatised welfare that demonstrably taxes people for being poor? And if you’re daft enough to get caught in it and not understand what’s going on, you end up losing out?”

The big problem is the impact that means testing will have on the savings on the millions of low and moderate earners who will end up contributing to personal accounts.

Bee says that that some savers will be able to save thousands of pounds in the new system and be no better off than someone who never saved at all but receives means tested benefits.

Bee says: “I don’t see any good coming out of it because sooner or later people will work out what has happened to them. They will see their next door neighbour who didn’t save being as well off as they are and they will think what a mug am I? What are we heading for mass confusion, mass annoyance. Why? Why not get it right?”

Bee says unless people are given full information the whole concept of personal accounts could be undone at a stroke.

On his website, the Beehive, where he tackles various pensions issues, Bee has written a piece called Five easy pieces, a take on Nobel prize winning physicist Richard Feyman’s introduction of nuclear physics called six easy pieces’.

“You can’t train people about nuclear physics in a couple of sound bites but you can give them a flavour. If you want to give people a flavour about personal accounts are about if you just push the positives you will be found out. I pointed out five things on the negative side. Is it possible to invest £25,000 in a personal account and not be one penny better off then your next door neighbour who doesn’t save? The answer is yes. It doesn’t matter whether anyone understands why that might come about and how the interaction with the extremely complex means tested system works. If the answer to that is yes then that’s a piece of information worth knowing. If that happens to you as an individual can you get your £25,000 back? The answer is no. That’s another valuable piece of information.”

The introduction of generic advice could be used to address this mismatch of information but Bee says he thinks it is unlikely to volunteer such negative information. But, if it doesn’t, the risk is when people do find out all the work that has been put into personal accounts will have been for nothing.

“I think the flaws are so great I could imagine in 2012 somebody like me could give enough information to journalists to enable them to right an 80-word article in the Sun or the Mirror or the Mail. These are the most powerful things. For instance, can you invest £25,000 and not being a penny better off? Yes. You could write that in 40 words. You could go through all the trouble of building this thing. Go to all the trouble of setting up the delivery authority and generic advice and all this stuff out there but it could be undermined totally by an 80-word article in The Sun.”

The other big problem with personal accounts is the fact that contribution rates have been set so low. As it stands, employees will pay in 4 per cent of their salary, employers 3 per cent and the Government will chip in with 1 per cent tax credit.

This, says Bee, is far too low. He points to the Government’s own figures which assume seven million people are enrolled and continue saving in the scheme for 40 years”Come 2050, the DWP are expecting there to be £150bn of assets in personal accounts. That is nothing compared with the £1,300bn we’ve already got in occupational pensions for one quarter of the population.

“I think you’ve got to look at the personal account as nothing more than just a tiny top-up to the already complex and convoluted state pension system of means tested hand out system.”

This complexity raises another issue with personal accounts. Lower earners will be in a situation where it is very difficult to know whether to save into personal accounts, but without a first rate generic advice system they will have no one to help them make the decision.

“There is a presumption that if you are not very well off you need less advice than people who are well off. I think entirely the opposite is true. If you’ve got to contend with the state entitlement system, part of which is a pension, part of which is means testing, part of which is a contributory S2P and Serps scheme and then the contributory personal accounts scheme – if you’ve got to contend with that to work out whether it is worth saving then I think you need far more advice than someone who saves with a pension now.”

Bee says in contrast to now, where IFAs fill this role well, they will not be able to do so in the future as this decision will involve actively opting out of a scheme that has employer contributions. Any IFA asked whether someone should stay in or opt-out is in an almost impossible situation.

Bee says: “As an IFA I would walk away.”

But Bee is not just interested in criticising the current plans and he does have a simple suggestion to solve the current list of problems. These involve a flat rate pension for all, a tax for higher earners to reclaim this pension that they don’t need and scrapping National Insurance and renaming it for what it is, a tax. This gets rid of any sense of entitlement and allows people to save, safe in the knowledge their savings are worthwhile.

Bee says: “What we need is a subsistence level pension. Use the tax system to take it back from people who don’t need it. Get rid of the sham that is National Insurance and just accept that we are paying tax and some of it is redistributed. You’d make pension saving or long-term saving suitable for everybody at a stroke. You wouldn’t then need to sweep people into saving.”


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