Pensions World

The success of the 2012 reforms will depend on the government’s ability to deliver a £140 week state pension, says editor Stephanie Hawthorne

In theory 2012 will see the biggest pension reforms since the introduction of the old age pension in 1908 with every employer in the land eventually compelled to contribute 3% of salary in a phased introduction to their employees’ pension. So how will the idea work in practice?

All employees will be auto-enrolled into a pension at least equivalent to the National Employment Savings Trust (Nest) with up to seven million first time savers. The idea is that once in a plan few will opt out, but the power of the media is immense – it only needs a few editors from the Sun, Daily Mail and Daily Telegraph to pour cold water on the idea and millions will still be pensionless. A great swathe of employees will opt out if they think they will lose means tested benefits on retirement and the reforms will then be pointless.

The key to the success of auto-enrolment and Nest is the government’s ability to deliver on its proposals for a £140 week state pension and greatly reduce means testing. If that is achieved, everything else will fall into place and my objections largely fall away. At present half the pensioner population is entitled to means tested benefits so saving for a pension without such reforms would be equivalent to double taxation – money foregone today and tomorrow.

A faltering start?

Nest and auto-enrolment are a start, but there is a danger, even when the scheme is fully in place, that savers will think their retirement is sorted with a combined 3% employer and 4% employee of salary contribution to a pension – 15% to 20% is more realistic. There is also the strong danger of employers levelling down to pay for auto-enrolment.

I would have preferred a compulsory funded state earnings related scheme for poor to moderate earners, but the decision was made to opt for a defined contribution pension. It is too late to go back to the drawing board. Following the excellent report of the review team, Paul Johnson, David Yeandle OBE and Adrian Boulding, both Nest and auto-enrolment are going ahead (see Box for changes).

One key point: the operation of Nest is scheduled to be reviewed in 2017 and it is essential that transfers should be allowed in and out of the scheme. Anyone who is in the workforce for 40 years is likely to have amassed several pensions and Nest could be a convenient way of amalgamating several small pension pots. Equally the cap on Nest must go – again it sends out the signals that saving up to the Nest limits will ensure a happy retirement. Sadly that is far from the case, but the reforms of 2012 are a shaky start to cleaning up Britain’s pensions mess. They have my support.

stephanie.hawthorne@lexisnexis.co.uk

2012 reforms: key changes

• The earnings threshold at which an individual is automatically enrolled will be aligned with the personal allowance for income tax; (£7,336 in 2010/2011 terms). However, the lower limit for contributions will continue to be based on earnings above the National Insurance primary threshold (£5,715 in 2010/11). Workers can opt in and receive an employer contribution if they earn between these two thresholds.
• There will be an optional waiting period of up to three months before a worker needs to be automatically enrolled, though workers may opt in during the waiting period.
• The process for employers to certify that their money purchase scheme meets requirements will be simplified.
• There will be further deregulatory measures to reduce burdens on employers.