The only game in town

The latest Pensions Bill is currently in its Commons committee stage. But the political consensus that emerged post-Turner has come under strain recently.

The Conservative Party is broadly supportive of the principles set out in the Turner Report. It is estimated that up to 10 million individuals will be eligible for auto-enrolment into qualifying schemes. For many of these individuals, the introduction of personal accounts in 2012 could be a massive step towards a secure retirement.

But in the run up to 2012, both we and the industry have raised a number of issues that must be addressed. We are particularly concerned with the mechanics of setting up and administering such a large scheme. Despite publicly professed ministerial confidence, even Tim Jones, the new chief executive of the personal accounts Delivery Authority, has expressed doubts whether the new system can be up and running by 2012. Any significant delay would be very bad news indeed.

For us, the interaction between personal accounts and our complex means-tested benefits system is cause for great concern. It is important that those who need them the most – low to middle income earners with no current pension provision – actually benefit the most from saving in personal accounts.

For a large number of people in “at risk” groups, saving in personal accounts may only result in the loss of means-tested benefits they would have otherwise been entitled to. There is a particular problem due to the effects of housing benefit for those who rent in retirement, although, surprisingly, department for work and pensions models do not account for housing benefit.

The “levelling down” of existing provision is another significant and potentially damaging problem, and of particular worry for those in the industry. In our view, personal accounts will be a success only if there is an increase in both the number of savers and the amount of savings.

However, the DWP’s own survey suggested 30pc of employers might reduce contributions for new employees in an effort to control costs. And in the most striking of scenarios described in a report by the Pensions Policy Institute, personal accounts could actually lead to a decline in total overall savings. Personal accounts should complement, not compete with, existing provision.

So as legislators, we must do everything in our power to ensure that employers are encouraged to keep open existing pension schemes where the employer contribution may be significantly more generous than the 3pc envisaged in personal accounts. In particular, we have pressed ministers to place the annual contribution cap of £3600 on the face of the Bill; inexplicably it is not at the moment. And we have tabled amendments to ban transfers, additional contributions and lump sums.

We have also tabled amendments aimed at ensuring there is a level playing field between personal accounts and other pension provision; in other words, no public subsidy, loans from government at non-commercial rates or the like.

And we must make it easier for final salary schemes to continue to operate. We must take seriously policy proposals on ‘risk-sharing’, such as conditional indexation and statutory override, now and not in a few years when final salary schemes might be beyond redemption. Personally I am willing to try anything that will protect and enhance defined benefit schemes. For they are the most likely to deliver a secure retirement.

Fortunately, DWP ministers have now acknowledged our concerns about means-testing. We understand it may take time to find solutions, but the fact that they are being addressed now, on a cross-party basis in parallel with the passage of the Bill, can only serve to boost confidence in the personal accounts system. We will continue to press the government on our other concerns.

We want personal accounts to be successful. We want individuals to feel secure in knowing they will get a decent return on their hard-earned savings, and not just their own contributions. And we want to be the government that will usher the new system into life. Personal accounts are the only game in town; but they must be designed to succeed not to fail.