September 2008

Campaign to save

Although the Pensions Bill was published last December, here we are in the last gasps of summer, and it's not yet law.

In a way, this is good news. Its progress through the House of Lords was held up by the extended time in committee, as peers challenged the draft legislation. The Bill returns to the Lords in early October, and we expect Royal Assent in November.

Now, before the political hostilities resume, is the perfect time to take stock. I agree with the main thrust to get more people saving more money through new employer responsibilities of automatic enrolment into a pension scheme and a minimum employer contribution. However, I worry the policy isn't robust enough.

One aspect is the interaction with means-testing. The improvements to the State pension will reduce the future number in means-testing, but it still clouds the message 'it pays to save', particularly for those fairly close to retirement. Government figures show those saving for ten years in a personal accounts scheme can only expect in return a 1% increase in their retirement income.

The Government needs to rescue this issue from the long grass, and to make improvements to the system.

In the short term we need to calm people's fears by giving them clear information about whether it's in their interests to save for retirement. This could be generic information in a red, amber, green traffic light format. People have the choice whether to start saving today and are being put off by the spectre of means-testing. We need to give them the reassurance to make that leap.

The personal accounts delivery authority (PADA) is ploughing on creating the personal accounts scheme. Although 170 people work there, most are seconded civil servants or contractors. They are effectively learning how to create a life office. This will take time and money and over the last two years the Government has allocated £57 million to PADA. It would have been quicker and easier to allow the private sector to help - we already know how to run pension schemes - and it's not too late to make that decision.

There's also the question of how and when taxpayers get back that and future sums of money. Costs will be recouped through scheme charges. PADA is swaying between two different charging structures. The first, a flat management charge, may be simplistic, but the other, a combination of contribution charge and management charge, is more effective at ensuring the scheme is financially sustainable. If not, it faces the risk of raising charges or going cap in hand back to the Treasury for more money.

The most important aspect is changing the UK culture to encourage saving. We need an effective Government campaign to encourage people to start saving now, through a joint engagement strategy with the industry, PADA, the Government and the regulator. The Government cannot afford to miss the private pension market out of the equation - we are already helping millions of people to save for their retirement. However, we also need the reassurance those who are currently saving in private schemes will not be worse off because of these reforms and yet the detail of the proposed law is threatening this. The Government has promised to listen to the industry again on how to design a simple contribution test, and I hope this time it listens.

We have a once in a lifetime opportunity to change the way the UK saves for retirement. The Pensions Bill makes a good start to realising this, but Government needs to work with the industry, and not against it, to make sure we achieve the goal.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable