Member News
By Ros Altmann - 5th February 2010
Millions of Britons are not saving – or not saving enough – for their retirement. Employers are scaling back their pension provision, replacing final salary schemes with far less generous money purchase arrangements. As the baby boom generation reaches retirement, this pensions crisis could become a pensioners crisis, with millions more older people struggling to live on very low incomes.
The Pensions Act 2008 seeks to address this by encouraging increased workplace pension provision. The main measure will require every employer to automatically enrol their employees into a pension scheme. To this end, government is establishing a national, low-cost pension savings vehicle, called the National Employment Savings Trust, or NEST (previously called personal accounts), specifically designed for low to moderate earners without access to good employer pension schemes. Although being set up by government, it will be run independently, with a board of trustees organising administration, investment providers, default options and day-to-day operations.
All workers who are not in an equally good workplace scheme will be enrolled into NEST. Unless they opt-out, 4 per cent of their earnings between £5,035 and £33,500 will go into their NEST and their employer must put in 3 per cent. So workers on £20,000 a year will contribute £100 each month – £50 deducted from their pay, £37.50 from their employer, and £12.50 tax relief. Every three years, employers must re-enrol workers who opted-out, who can then opt-out again. Auto-enrolment is designed to overcome some of the inertia that often prevents people from starting a pension. They will have to make a conscious decision to leave the pension scheme, rather than having to actively decide to join.
The policy thinking behind NEST is laudable in theory. In practice, however, given the existing UK pension system, I fear the stated policy goal of ensuring good private pensions in future – especially for low to moderate earners – will not be achieved. Indeed this policy might make pension provision worse overall.
There are several dangers. Firstly, over 40 per cent of future pensioners will qualify for means-tested benefits, so many workers contributing to NEST may be little or no better off when they retire. Even on the government’s own figures, some 600,000 future retirees could find their NEST gives them no pension at all – mostly lower earners who can least afford to save. This issue cannot be brushed aside. Proposals are needed now to help those who may lose out. Perhaps NEST pensions could be disregarded from means-test calculations, or treated like an ISA?
Secondly, government has failed to focus sufficiently on the dangers of disappointing investment returns and worsening annuity rates. Pensions for lower and middle earners are about retirement security, not just maximising investment returns. Investment and annuity risks are serious threats to ultimate pension outcomes. Official studies, forecasting good NEST pensions, assumed 80 per cent would be invested in equities giving high returns – and annuity conversion uncertainty was completely ignored. If equities perform poorly or annuity rates worsen significantly, NEST pensions will be much lower than expected.
A further danger is that employers will cut pension contributions towards the NEST minimum, leaving workers currently in an employer scheme with less pension in future. The CBI has already warned about employers cutting back from today’s average contribution level of over 7 per cent in defined contribution schemes, to the ‘official’ minimum 3 per cent. This levelling down is at least as big a threat as means-testing penalties.
Why is there a consensus favouring this policy? Could it be because NEST offers short-term benefits to powerful vested interests, which ignore longer-term dangers to ordinary workers who do not yet realise the risks?
For example, the Treasury will benefit as workers save to replace state support. Financial companies will earn good fees on managing NEST funds each year, irrespective of the pension outcomes. Large employers have an opportunity to cut contribution levels. And, of course, politicians will claim credit for encouraging more people to contribute to pensions. Essentially, what really seems to matter to policymakers, employers and the financial industry is how much money is being put in, whereas what really matters to workers is the pension they get out.
There is no certainty about long-term investment, there is no magic that will transform small contributions into big pensions. But those contributing to NEST will be relying on the fact that they are saving in a government-designed scheme, and will believe their pension is sorted.
With just generic advice, who will help workers understand the long-term risks and appreciate that they may have to save far more, or plan to work longer, in order to fund the retirement lifestyle they hope for? Certainly, encouraging them to believe that NEST will provide them with retirement security risks further pensions disappointment in years to come.
This policy should be re-thought before it is too late.
Dods Parliamentary Communications Ltd