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The pension marathon

The final nail has yet to be hammered in the final-salary coffin but it is getting closer by the day. The revelation that pension scheme deficits of £41bn have reappeared will trigger more closures.

As Ros Altmann, the outspoken pension campaigner says: “It is inevitable that employers will keep on closing schemes both to new and existing members, especially in the face of so much uncertainty around the funding and costs. This is the final chapter.”

Yesterday’s generation were fortunate with their company pension provision but future generations will have to rely on the personal accounts due to be launched in London Olympic year in 2012. I would expect that Britons will have gold medals (or the lack of them) on their minds rather than worrying about saving for retirement, which could be a costly mistake to make. The supposition that signing up to the scheme will benefit the average Joe is highly questionable.

It is six years since Adair Turner, the former director-general of the CBI was appointed chairman of the Pensions Commission to examine how best to defuse our pension timebomb. The findings led to personal accounts but there are still question marks over its likely impact.

The Government’s insistence on means-testing is one potential stumbling block that has been mooted many times before. Opposition parties are concerned that Government estimates that 30 per cent of pensioners will remain on means-testing are too low.

If these sceptics are right, large numbers of people may end up salting away hard-earned money for no reason, as means-testing could cut their entitlement to pension credit and they would be no better off than if they had no private pension and got the full credit.

Employers will also be able to discount the first £5,000 of earnings for pension contributions. Someone in a scheme today whose employer contributes 3 per cent of their £20,000 salary could theoretically see their employer’s contribution cut to 3 per cent of £15,000.

Besides all this, the eventual pension pot for the target audience is not going to add up to much anyway. According to Hargreaves Lansdown, a 22-year-old earning £20,000 a year today and paying a total of 8 per cent into a personal account (and ignoring the first £5,000 of income) can expect a retirement income of just £4,750 at the age of 65.

And it has now emerged that people who have around 20 years or less to retirement are as good as wasting their time. The DWP tells us that low-earners will only see their retirement income increased by 1 per cent of their salary, or £2 a week, after 10 years saving in the Government’s flagship new pension scheme.

Let us not forget that times are tough for companies and there is no quick fix in sight. With firms under increasing strain, you wonder whether those that contribute generously to staff pensions at the moment will cut their contributions to 3 per cent in line with the personal account criteria.

Smaller businesses are up in arms about being forced to offer these schemes in the first place. They argue that the notion that all employers can afford to pay into pension schemes is misguided.

The personal account looks far from being Britain’s pension saviour and many employees may be better off opting out. Yet, the Government is already beginning to play hardball with employers. It fears that employers will encourage employees to opt out of the scheme – thus saving the employers from having to pay contributions – with financial inducements such as higher salaries or one-off bonuses.

To prevent this happening, the Government has introduced amendments to the Pensions Bill that would see encouraging or forcing workers not to save in a workplace pension become unlawful.

It reckons it is “very important that people are allowed to meet their retirement expectations by building up the savings they need”.

Sadly, those expectations may not be up to much anyway. That the personal account will make it to the starting line in 2012 is no longer in question. Whether it has the legs to carry on running is an altogether different question.

Paul Farrow is digital personal finance editor at the Telegraph Media Group Money Marketing

50 Poland Street, London W1F 7AX

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