The government is being ‘optimistic' about the amount of new savings which will be generated by personal accounts, claims Aegon Scottish Equitable.
In its response to the pensions white paper: ‘Personal accounts: a new way to save’, Aegon says analysis of research carried out by Deloitte reveals on average the target market for personal accounts are saving almost 9% of their income.
As a result, the company says the government risks “significantly overestimating” the amount of new saving which will be generated by personal accounts. Instead, it says much of the money invested in the new scheme will be redirected savings from both the target and wider savings market.
Aegon says the Deloitte research shows people in this target market - low to median earners - have been saving an average of £1,600 a year, or just under 9% of average income, while around half the target group, just over 4 million people, claim to be making average pension contributions of just under £1,000 each year, or 5% of income.
In the white paper consultation, which closed on Tuesday, the government predicted 60% of the estimated £8bn a year of personal accounts savings will be new money, however, Aegon claims this assumes relatively low current average savings levels in the target market.
But it says the Deloitte research suggests the 60% figure is “optimistic” and calls on the government to work with the industry to find ways to increase the level of new saving, as the white paper estimates of new saving also assume ‘reasonably low’ levels of opt out, despite admitting up to half of people may choose to opt out of personal accounts on the grounds of affordability.
However, Aegon suggests the government could minimise this risk of levelling-down by using auto-enrolment to enhance existing pension saving rather than encourage switching, by making employer contributions available on top of existing pension saving.
Rachel Vahey, head of pensions development at Aegon Scottish Equitable, says the government risks failing in its key test of pension reform, which is to boost overall retirement provision.
She says: “Rather than stimulate new saving, people who already save will redirect savings into personal accounts and those who don’t will most likely opt out. If this happens a significant number of people, who are currently on target for a decent income in retirement, could end up a lot worse off.”
“Before forging ahead we urge the government to define more carefully the target market for personal accounts and to analyse in detail its savings habits. Only when the government has done this can it set a strategy for getting the right people to save more money,” warns Vahey.
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