May 2007

Personal accounts

Rewarding savers

In a country where we expect the number of people over 64 to swell from the current 9.5 million to 15 million in 2040, the drivers for the continuing reform of the UK's pension structure are pretty clear.

The fact that many of those making inadequate provision for retirement are from low to moderate income households, where they are not always well-served by some existing pension products. Inertia, short-termism, and difficult choices all contribute to the problem and has led the government to focus on solutions and rightly so, in our view.

This brings us to the publication, in December 2006, of the White Paper on personal accounts: a new way to save, with which the government is trying to create a simple, low cost scheme aimed at encouraging low to moderate earners to save for their retirement. With features such as auto enrolment and low costs - the aspiration is for management charges to be capped at 0.3% - personal accounts have many commendable features. While auto enrolment would encourage low to moderate earners to save for retirement by relieving them of potentially difficult decisions, employees in stakeholder schemes cannot be auto enrolled into their existing stakeholders and it would require a legislative change to enable that to happen.

It is also understandable for the government to want to ensure that everyone in retirement has a basic level of income. But, in addition, the government has an important role to play in conveying the message about the need to save for retirement. It is important for people to understand that in a country with an ageing population, the State will only be able to afford a basic level of subsistence. For those who want more from their retirement, the government needs to articulate the fact that it will only be affordable if they have saved.

Demonstrably better off by saving

It is also essential for the government to ensure that those who save, no matter how little, will be demonstrably better off than those who have not saved at all? At the moment that is arguably not the case. Means tested benefits effectively tax pension savings at 40%. Which means some employees would actually be better off if their employer increased their wages rather than contributed the same amount to their pension fund.

Pension credit may have lifted many of today's pensioners out of poverty but it should not act as a disincentive to long term saving to those in work. Whatever the solution - and it may mean addressing means tested benefits or devising alternative ways to use the State second pension, we simply cannot afford to have people deterred from saving for their retirement. It should never be too late to start saving and we will only succeed in incentivising people to save if they see a tangible benefit from doing so.

We strongly believe that those who save should be demonstrably better off than those who do not, and that it is a key responsibility of government to ensure this is so, and that people understand it to be the case.

Neither should we discourage the seven million people who are not saving enough for their retirement by allowing them to lose five years of potential saving, as we wait for personal accounts to be introduced in 2012. With stakeholder pension schemes such as EasyBuild - already meeting most of the requirements of personal accounts - we don't have to throw the baby out with the bath water by excluding them in favour of a new scheme that will not be available for another five years. Good, existing low cost schemes such as EasyBuild, which accepts low value contributions and has an annual management charge designed to meet administrative costs, at just 0.8%, are already available in 2007 and should not be ignored.

Given help from the government with changes to pension legislation to create a level playing field and harmonise the requirements and capabilities of both schemes, between stakeholder and personal accounts, it is even possible that charges on schemes such as EasyBuild could be reduced even further. We strongly believe the government should enable people to make good use of the next five years, and that good stakeholder schemes should be working alongside the new personal accounts.

John Jory
Deputy Chief Executive
B&CE Benefit Schemes