There is widespread agreement that people need help saving for retirement but there is a growing bank of voices questioning the detail of the plans and whether they will deliver.
I support the underlying planks of automatic enrolment and minimum employer contributions which should help boost retirement saving. But the legislation, and the way it is being put into practice, has the potential to damage pensions and people’s lives.
The question of how pension savings interact with means-testing stands out. A significant proportion of people will be means-tested in retirement, meaning they lose the value of their employer’s contributions or, worse still, their own as well.
The Government has to take action and rescue this issue by considering what changes it can make to the system to send the message that it pays to save. The Government or the FSA needs to devise clear information to help people decide whether to join a pension scheme. It should not be left to the employer or adviser to carry the can for advising on the effect of Government policy.
Aegon did not support the decision to build a standalone national pension scheme, believing using the infrastructure of the private market was the simplest, quickest and least risky approach. But if the Government goes ahead with the personal accounts scheme, it cannot be allowed to fail.
In the long term, the Government wants personal accounts to be self-sufficient, using member charges to cover costs so it is crucial that it is financially sustainable.
Choosing a charging structure that combines an annual charge with a modest contribution charge avoids the three risks of higher up-front costs to taxpayers, that charges may go up in future and that the scheme might have to go cap in hand to the Treasury.
We also need clarity about how Pada is spending the funding it has received – £36m for this tax year and £12.5m last year. Greater transparency will allay fears that personal accounts are being unfairly subsidised.
The personal accounts scheme is a gap-fill. It will serve employers which do not have a pension scheme and it should complement, rather than compete against, the successful private pension market.
It is critical that people who are saving now in existing schemes do not get a smaller retirement income as a direct result of these reforms. The minimum contribution test proposed in the Pensions Bill could paradoxically trigger a reduction in employer contributions. By forcing employers through bureaucratic hoops, there is a danger they will level down to the minimum contribution, meaning that low- earners, especially women, could be hit hardest.
Automatic enrolment on its own will never be enough, we have to change the savings culture. A joint engagement strategy with the industry on board can help pro- mote the reforms and saving in general. Pension reform cannot be allowed to fail. Now is the time for action.
Rachel Vahey is head of pensions development at Aegon