Getting the new pensions settlement badly wrong
There is a very poor article attacking the new pensions settlement due to start in 2012 by Jeff Prestridge in today’s Mail on Sunday. It’s a tired litany of every old criticism, and based on a fundamental misunderstanding of what is actually happening in 2012.
Prestridge seems to think that what is happening in 2012 is the start of Personal Accounts. But the real change is the start of auto-enrolment and employer compulsion. For the first time – and this is a historic breakthrough that any journalist who wants to be seen as a consumer champion should welcome – every employer is having to contribute to the pensions of their staff unless the employee individually opts out.
This will require every employer to have a pension scheme for this purpose. Some have one already, others will acquire one from a pension provider, others will use Personal Accounts.
These are a new pension that will be provided by a new public – but very arms-length from government – body. It will be set up as a Trustee Corporation run by trustees, legally bound to look after the interests of its savers.
We need a new body because existing private pension providers have failed to provide the kind of low cost products the target audience for the reform of low to average earners need. There must also be a supplier of last resort for those employers who refuse to actively do anything about their new obligation or who no private supplier wants as a customer.
But many, many people will be auto-enrolled into other pensions. You cannot talk about 2012 on the basis that all is happening is that people will start saving in Personal Accounts.
This basic misconception flaws almost every other argument.
The silliest accusation against the new settlement is that it will encourage employers to level down good existing schemes. The real pensions crisis is the growth of the unpensioned – employees receiving no employer contribution towards a pension. That is now running at 60% of the private sector workforce. Their employers have already levelled down to providing no pension at all.
Of course the nature of a capitalist economy is that employers will try and reduce costs. That includes pensions (at least outside the boardroom). They will always blame someone else, with the government being a particularly popular scapegoat. But to suggest that we should not go ahead with auto-enrolment because employers will use it as an excuse is barmy.
The next attack is that these pensions will be “mis-sold” because some people may lose out because of the interaction between their pension and means-tested benefit. I’ve dealt with this at length before. But in brief, while there is an issue here, it is not as big as the critics suggest according to DWP research. But importantly it applies to all pensions savings not just personal accounts.
This is why the call to guarantee personal account savers that they would not be worse off in retirement is badly flawed. Why should only the savers in one pension scheme get this guarantee? And why build into the pensions system a massive incentive for a future government to reduce the means-tested safety net so they don’t have to pay out on such a guarantee?
There are much better reforms that can minimise the interaction with means-tested benefits such as some technical changes to benefit eligibility and mean-testing, but this is not as big an issue as the critics suggest. It certainly is not any kind of reason to stop auto-enrolment and employer compulsion in 2012.
The final attack is deeply contradictory. People who say that we should not go ahead with the new settlement are complaining that it will take too long to get going. I’d like to see quicker implementation, but delay is hardly a reason for indefinite postponement.
The delay is because there is both staging and phasing.
Phasing has always been part of the plan. Requiring employers to contribute to a pension is a genuine – if justified – burden on business. They are therefore being allowed to phase their 3% contributions (though only on earnings between about £5,000 and £33,500) over three years.
Staging is new. This means employers will not all be required to start auto-enrolment on the same day. The calculation has been that this is simply too big an administrative task for Personal Accounts and the Pensions Regulator, who will have to police the new system.
That is disappointing, but I can imagine what the media would say if a big-bang start went wrong. I still hope it can be speeded up.
But to suggest that the new settlement should be scrapped because of this is bonkers.