The future of pensions will not be about people voluntarily saving in what is "basically privatised welfare", says Steve Bee.
Speaking at the Pensions Management Institute’s (PMI) autumn conference in London, Bee, head of pensions strategy at Royal London, was discussing whether the future of pensions was ‘bleak or bright’.
And Bee suggested the future will see a completely different marketplace, where the collapse of the Defined Benefit (DB) sector will drive a new form of pension saving which will consist of Defined Contribution (DC) schemes and maybe self-invested personal pensions (Sipps).
But he warns: “The era we’re heading into has nothing to do with people voluntarily putting money into pensions, and everything to do with the people who already have them finally understanding what they’ve got and taking control.”
Discussing the proposals for personal accounts put forward by the government, Bee said although he doesn’t expect to see the results of the consultation until next year, he says the system will cause confusion, especially among small employers.
He points out they won’t like it because in a small business such as local shop or takeaway, the 3% compulsory contribution is employees are automatically enrolled into the scheme mean they won’t have money to do other things such as expand, and it may be easier for them to save the money by sacking the workers who want to stay in it.
In addition Bee says the system of personal accounts is “basically privatised welfare”, as he points out if means-testing is not reduced, people saving in personal accounts who will be subject to pension credit could lose 40% of their savings.
He says if means-testing stays as it is, around 75% of the working population will be means-tested in retirement, and although the government has proposed methods to try and make the basic state pension fairer, women and carers will be the ones who will suffer most.
In his presentation Bee points out many women will still have gaps in their basic state pension for whatever reason, which will be filled by the money built up in their personal accounts or other pensions.
And as they did not qualify for the full basic state pension, Bee says they will still be subject to means-testing so whatever savings are left will lose 40%, which means for a lot of women being in a pension, or personal account, "probably isn’t worth it".
Meanwhile he points out at the moment the UK has voluntary private sector pension savings of around £1,300bn, of which £1,000bn is in final salary DB schemes, and he says once these schemes are fully funded there will be an “individualisation of pensions”.
He says once these schemes are better funded, the occupational pensions market will start to break up and people will get more interested in pensions as they finally realise just how valuable their pension assets are.
Bee adds: “The future market will boom because those who already have them will buy more, not because those who don’t have them save in something which isn’t suitable for them and which is basically privatised welfare.”
He says the market which the government is talking about which will be created by the introduction of personal accounts in the future is a “false market” and is not going to happen.
“The real market will be the shift away from occupational pensions to personal pensions and individual control. It will be completely irreversible and while it might be good for some, it will not be a good thing for many others,” says Bee.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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