The new scheme will change the employee benefits landscape, but as Peter Barnett points out, there will be winners and losers
Some readers may remember the 1991 movie Boyz n the Hood, starring Ice Cube and Cuba Gooding Jr., about gang violence in Los Angeles - and how the ordinary hard-working folk get caught in the violence.
The film came to mind with the first reading of the Pensions Bill 2011 which took place on 12 January. This may be a huge leap, but as the Department of Work and Pensions and the pension industry - the forces behind the new National Employment Savings Trust (NEST) - strut their stuff, sometimes the very people they claim to represent can get lost in the crossfire.
However, there are no good guys and bad guys here. It is absolutely right to subscribe to the aims and ambitions of NEST; to get more people saving for their old age; for the government to get to grips with funding the lifestyle and health of an ageing population; and to follow the good track record of employers and the pensions industry in providing sound occupational pension schemes over many years.
The basics of NEST
NEST is designed specifically to meet the needs of people largely new to pension saving. Both NEST and the educational tools that will underpin it, such as its pension terms phrasebook, are very big steps forward in making pensions both accessible and easy to understand.
NEST will be a valuable addition to the pensions landscape, but we must also be alert to the law of untended consequences, which means that unless we remain vigilant there may be losers as well as winners.
The Pensions Bill will bring into law the findings of the review into the state pension age, complete the restoration of the link between earnings and the basic state pension by 2012, implement auto-enrolment into personal accounts (PA), and replace RPI with CPI as the measure of indexation for occupational pensions.
It is intended that the Bill will receive Royal Assent by the end of 2011, so that 2012 indexation payments can be calculated using CPI. The passage of this Bill will also throw into sharp focus some of the remaining unresolved issues that surround the NEST proposition.
For while there is widespread support for the principle of auto-enrolment and broad agreement that the proposed levels of contribution to personal accounts (4% individual, 3% employer and 1% from tax relief) are reasonable, many commentators have significant concerns about personal accounts.
The pros and cons
Plainly, any amount saved in a personal pension has to be better than nothing. Even a small pot, coupled with the state pension and the availability of other asset classes such as savings and housing equity, may make a real difference at the marginal level - where most ordinary people reside.
But significant difficulties remain which resolve into two main strands. Firstly, PAs may not be suitable for all employees, particularly for some low-earning individuals in their 40s and 50s. The charging structure of NEST, the introduction and staging of auto-enrolment, and the employer contribution may significantly reduce the size and value of saving pots for those close to pension age. This is especially the case for single people who in addition may lose entitlement to means-tested benefits depending on their overall household income.
Down the line, we potentially risk mis-selling accusations arising from such individuals with PAs. This is because that element of disposable income expended on pensions could well subsequently be shown to have derived much better value from the funds being devoted to other forms of saving, such as ISAs, during their working life.
Secondly, despite NEST being aimed at new pension savers, there remains a significant risk of levelling down of existing pension provision. If they have an existing scheme, then employers may feel that a 3% contribution into an auto-enrolled, government-backed scheme is a more economic and less risky investment than their current pension system.
Many employers currently put at least 10% of an employee's salary into their pots, and it is reckoned that about 20% of salary is required to be saved for a 45-year-old to retire at 65 on a reasonable pension. But if the average total contribution was to reduce to the 8% level set by NEST, fewer people would be able to maintain a lifestyle in retirement to that enjoyed at work, let alone stand any chance of funding any care needs in later life.
Moreover, younger employees may not necessarily entertain warm feelings for an employer who provides them with a pension, preferring (however unwisely) to see the money now in their salary. They either don't value the pension scheme membership as much of a benefit, or don't anticipate staying with that employer until they retire, or both. At the same time, the employer won't necessarily expect young workers to stay for long.
Indeed, it will be interesting to see how highly the provision of a PA pension scheme is rated by various age and dependency cohorts alongside other employee benefits, such as holidays, life assurance and travel subsidies.
