The activity level in pensions lobbying circles has recently edged up a notch or two. We received the White Paper on personal accounts just before Christmas, and now are turning our attention to drafting a response by the deadline of 20th March.
The government hasn’t spent the last couple of months standing on the sidelines patiently waiting for responses to start flooding in. Instead, it has been fairly visible pushing its main messages – especially on the subject of ‘incentives to save’.
In plain English, ‘incentives to save’ means to what extent will means-testing erode the savings built up from personal accounts, and should we be letting people auto-enrol if they will eventually ‘lose out’?
There is no doubt this is the government’s biggest headache on personal accounts. If they lose the ‘auto-enrolment argument’ they lose one of the main pillars supporting the reform, and instead will be left with only mandatory employer contributions. This on its own can’t necessarily turn around saving for retirement amongst certain groups of the population.
Both Government and others, in particular the PPI, have given a lot of time and effort to examining figures of what people can expect back from their savings. The overall message is that a young person saving for 40 years can expect to get back over £2.50 for each £1 saved. That figure starts to reduce as the length of time saving falls (for example through unemployment), and the PPI has classed this as ‘amber’ in a 'traffic light' scheme, where people are at medium-risk of losing out. But as the interaction with other benefits kicks in (such as housing benefit) the code changes to ‘red’ – a high-risk situation.
When they are auto-enrolled people won’t necessarily know if they are going to be winners or losers. They won’t know if they will have long periods of unemployment. They won’t know if they are going to rent in retirement. The only thing we can say with certainty is how old they will be and the length of possible savings period they have left. Generic advice would probably guide most over-50s to opt out. But isn't it more efficient all round to simply set a maximum enrolment default age of around 50?
The government has to make it very clear that auto-enrolment - into personal accounts or an employer’s exempt scheme - is in the ‘greater good’ of the UK population, and an issue for the nation’s benefit. It’s the same as wearing seatbelts or not drinking and driving. This approach lets us take the emphasis away from the individual case, and along with it the spectre of future review.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable.
The views expressed are those of the author and not those of the company she represents.IFAonline
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