Back to the drawing board

The government has announced a delay to its flagship reform of private pension savings and will now not be fully implemented before 2016, beyond the next Parliament. This gives an ideal excuse to rethink the whole scheme.

The policy should be halted, not delayed, because Personal Accounts, as currently designed, could actually damage private pensions for many workers, rather than improve them.

The plan is to automatically enrol every worker who does not already have access to a 'qualifying' employer pension scheme into a national scheme of personal pension accounts. Workers will have to contribute 4 per cent of salary into the scheme, with their employers putting in 3 per cent. The laudable aim is to broaden pension coverage and improve lower earners' pensions. So far, so good, but unfortunately the current pension environment is not conducive to this system.

There are many reasons to be concerned about Personal Accounts. A nationally-organised, low cost private pension scheme has theoretical attractions, but it also puts the government at risk of being held responsible in future for people wasting their savings.

As things stand, it has far more potential to make pension provision worse, rather than better. For a start, the 3 per cent minimum employer contribution has now given employers the target of cutting back to the 3 per cent minimum and some are already cutting contributions in advance, so people currently in employer schemes may end up with less pension once the lower employer contribution is taken into account.

In addition, many individuals will be automatically enrolled who should not be in pensions at all. Pensions are unsuitable for many people, but there is no independent advice built in to help people understand the risks and complexities they face. Generic advice cannot possibly address this adequately.

Why is the policy going ahead despite its potential pitfalls? Well perhaps part of the reason is that Personal Accounts do offer excellent opportunities to large interest groups, especially in the early years, whereas the threats posed will be faced by individuals over the longer-term. These large interest groups all stand to benefit in the first few years of Personal Accounts, which must go some way towards explaining the 'consensus' in favour of the scheme.

The groups who stand to gain short-term advantage are politicians, who can claim that they have solved our pension problems by getting millions of people saving in a pension; the Treasury, which sees an opportunity to save benefit costs later as many people will actually just be saving to replace means tested benefits in future; financial companies, who will earn fees on managing the Personal Accounts (even if they are low fees, they still amount to attractive revenue streams); and also there are opportunities for employers to cut their current pension contributions - which average over 7 per cent in defined contribution schemes at the moment - down towards 3 per cent. Employers are being tempted with a nationally organised scheme that will allow them to cut their pension costs substantially - and also avoid the need to organise their own arrangements for their staff. Hardly a surprise, then, that the Confederation of British Industry has welcomed Personal Accounts.