It pays to save
By Minister for Pensions Reform Mike O’Brien
When people ask me why this Government is overhauling the pensions system, I have a simple answer - because people aren’t saving enough and they’re in for a rude shock when they come to retire.
It’s a brutal truth, but with life expectancy growing, expectations for retirement are growing with it.
People are no longer content with the quiet retirements enjoyed by their grandparents. They aspire to foreign holidays, active social lives, shopping sprees and meals out.
But such aspirations can only be met if people make private provision for their pension.
So it’s an uncomfortable fact that, despite the unprecedented economic growth and stability this country has enjoyed for the past 10 years, about seven million people aren’t saving enough for their retirement.
There are a number of reasons for this inertia, not least the tendency for people to switch off and do nothing in the face of an overtly complex pensions system.
We had to tackle this problem of undersaving and that’s why, from 2012, millions of people will be automatically enrolled into a system of personal accounts or a qualifying workplace pension scheme.
Legislation to achieve this will be introduced in the next parliamentary session, marking one of the biggest leaps forward for pension provision since National Insurance was introduced in the 1940s.
For the first time, employees will have a guaranteed contribution from their employer towards their pension. The employee will put in a minimum of four per cent of their salary, the employer a minimum of three per cent and around one per cent comes from the Government in tax relief. This means individuals’ own pension contributions will be doubled.
Reforms to make the State pension simpler, more generous and more widely available will ensure future pensioners have a solid platform on which to build.
Automatic enrolment into a qualifying scheme or personal accounts will give those who want to the opportunity to provide extra for when they retire.
To ensure those personal accounts complement, rather than compete with, good existing pension provision a number of measures will focus the scheme on those moderate to low earners without access to good quality pension provision, including prohibiting transfers and proposing a simple and straightforward scheme qualifying test.
We have consulted widely and listened to the concerns of the pensions industry in this area, as our recent decision to opt for a £3,600 annual cap on contributions demonstrates.
We believe these measures will encourage existing provision and guard against 'levelling down'.
In fact, as a result of personal accounts, we expect to see more employers ‘levelling up’ as around one million of them currently provide no pension or make contributions of less than three percent.
And don’t forget that for many employers offering a decent workplace pension is a good way to attract and keep staff, so it makes no sense for them to level down.
There’s no doubt automatic enrolment and a wider public awareness of the importance of pensions will see the number of people in a pension scheme rise dramatically.
Of course, precise returns on long-term investment cannot be predicted, but most people who save into a personal account during their working life can expect to benefit substantially from their saving.
For the minority of people who experience unfortunate, and unexpected, circumstances there is a State provided safety net in the form of the benefits system, guaranteeing a minimum level of income.
However, this £119 a week guarantee is the minimum needed to keep pensioners out of poverty – it is not a substitute for saving and does not meet today’s aspirations.
So it’s bizarre that some people want to turn this argument on its head and advise people not to save in case they find themselves on means-tested benefits. It can only mean people missing out on years of employer contributions and investment returns, a decision exposing them to risk and uncertainty.
Since we embarked on this journey, we have consulted widely in a bid to reach a consensus on the way forward. Through a series of events designed to engage debate, I believe we have achieved that.
So while we may debate the detail, we are pressing ahead with the introduction of personal accounts.
We’ve already set up the personal accounts delivery authority to offer independent advice to the Government. It will be responsible for getting the scheme up and running.
The pensions industry will continue to play a vital role in the development of our overall proposals and help us to create a vibrant savings market in which it pays to save.