My concern about Personal Accounts which have automatic enrolment is that people will have no idea whether it is in their interests to do so. Naturally, people will assume that they will be better off in retirement, but unless means testing is removed, that is not necessarily the case. Do you intend to produce a table showing what they can expect by paying into a Personal Account compared to what they can expect if they do not, taking into account means testing? After all you cannot expect people to buy something without knowing exactly what they will get for their money.
James Purnell responded:
This is a crucial point – you’re right that we will need to give people confidence about saving through Personal Accounts.
We think that it will pay to save in Personal Accounts, for the vast majority of people. That’s mostly because of the employer contribution – for every pound people put in personal accounts, they will get a pound from their employer.
We’ve done a lot of analysis on this, and we’ll publish it in the Autumn, so people can see for themselves if they agree.
But I think it’s also worth being clear about what the reasonable criteria of the policy is here. You talk about “people knowing exactly what they will get for their money”. But no pension system produces this – private pensions can go up and down with stock market variations; even state pensions vary if governments change the legislation, as happened with State Earnings Related Pension Scheme (SERPS) for example.
So, I don’t think the criteria is a certainty. Instead, I think we need to give people a reasonable expectation that they will be better off – and we think we will meet that because the vast majority of people will be better off, as long as their investments do OK. And, as you say, we need to give people information so they can make those decisions about saving as easily as possible.
AlanE wrote:
I don't see the point of introducing these personal accounts and then give people the choice to 'opt out'. Surely one of the problems at the moment is that young people don't think about pensions early enough? Won't this approach mean they will simply opt out to increase the amount in their wage packets?
James Purnell responded:
Thanks for your comment – essentially, you’re suggesting we go down the route of compulsion. We did look at this, but decided against it in the end. We thought that people should be able to decide not to save for a pension – for example, they might want to opt out for a while to save for a deposit for a house or pay off some debt.
But nor did we think the current purely voluntary approach would work.
So, we thought that automatic enrolment strikes the right balance. We think 6-10 million people will end up saving through personal accounts, and that will make a big dent in our under-saving problem.
And it’s also worth noting that people will be automatically re-enrolled every three years. So, if a 22 year old opts out, they’ll get re-enrolled at 25, 28 etc…
Paul Herring wrote:
How will the new plan – of me contributing 3 per cent of gross, my company contributing 4 per cent and the Government contributing 1 per cent – affect my current situation where I contribute 16 per cent, my company 5 per cent and the Government 4.5 per cent.
It appears that I'm going to be losing out somewhat here. Do I actually have to 'opt out' of the personal accounts in order to continue paying into my current stakeholder pension?
In addition the way things are being presented at the moment, it seems that this would be an ideal opportunity for businesses that currently offer more than 3% gross contributions, to cut them back to 3 per cent, and in addition that the government plan to reduce your contribution by 3.5 per cent - this cannot be right surely??
James Purnell responded:
All employees, from the age of 22 earning above around £5,000 will be automatically enrolled into either a personal account unless they already have access to a good workplace scheme such as the one you describe. That would mean you stayed in your current scheme.
We would certainly hope that employers didn’t use the introduction of personal accounts as an excuse to reduce the contributions they are making. And our research suggests that this number will be extremely small.
I agree with you that it would be regrettable if employers did cut back – but the truth is that there is nothing to stop them cutting back to nothing if they want to at the moment. We surveyed employers to ask their intentions around this – and they made clear that they saw their pension schemes as an important way of retaining and recruiting staff, and wouldn’t want to cut back on them.
The Government is committed to supporting those employers who are already providing good occupational schemes. That is why we have begun a deregulatory review to reduce the administrative burden of running such a scheme, whilst ensuring that their members are adequately protected.
The tax incentives offered by the Government to those saving in a stakeholder pension will remain unaltered by our reforms.
Alex Nicholas wrote:
My main worry is that employers currently offering generous contributions to occupational schemes may force employees into the government scheme and lower their contributions to the statutory minimum. This must be addressed if workers are to have confidence in the new scheme.
James Purnell responded:
Our research indicates that the extent of this “levelling” down effect is likely to be limited. Employers contributing more than 3 per cent said that they view their pension scheme as an important recruitment and retention tool that they want to keep. Preliminary findings from a survey of 2,500 employers indicate that of those employers who report that personal accounts would mean an increase in total pension contributions – Only just over 1 per cent who are contributing 3 per cent or more said they would level down.
Russell Morton wrote:
On the subject of 'forced' pension contributions.
Please consider that there are many of us on very low or non-existent incomes for whom any deductions from pay will only lead to financial hardship. There surely would have to be a minimum salary level involved?
From my personal experience searching for work in the Blackpool area over the last four months it looks like the only jobs on offer are on the basic minimum wage – age and experience count for nothing around here. You cannot pay a mortgage and household bills (utilities) on the minimum wage – or on Jobseeker's Allowance !!!
Tks+Rgds, Russell
James Purnell responded:
You’re right – there will be a minimum salary. Those earning less than £5000 per year (roughly) would not contribute. And you would only contribute on the proportion of your income above that – so, if you were earning £10,000 a year, your contributions would be roughly £4 per week.
And if you didn’t think that was affordable, you could opt out. However, if a person doesn’t save for retirement they could end up with an income equivalent to around £114 a week. For many people such a substantial drop in income on retirement would be unacceptable – they have an incentive to save for retirement and our proposed reforms will enable them to do this.
Mr Dave Jones wrote:
Who are the people you are trying to encourage to save? Those people on low incomes? People who simply do not consider there retirement options? Everyone?
The first group may find it difficult to save, because of the lack of surplus funds, so why should they save for something as intangible as retirement rather than, for example, the next holiday.
The second group may have sufficient income to enjoy life. Again why save?
If your intention is everyone, then what about public servants (I'm one) who already pay contributions to a company pension? I assume this is another group who will opt out.
So there are three groups I've quickly outlined who will opt out of Personal Accounts. What single thing can make them change the habits of a life time and save for retirement when for to long the state has provided a safety net!
Personally I'm looking to supplement my state pension, but by doing that my extra 'income' is taxed. Not much encouragement is it?
James Purnell responded:
Without reform, millions of people could face unexpected and unwelcome drops in their income in retirement.
Latest DWP estimates suggest that at least 7 million people are undersaving. So that is our main target for these reforms – people on low and medium incomes who are not currently saving at all (or enough) for their retirement.
The single thing that we think can make a difference is automatic enrolment – we think it will mean many more of those 7 million saving. And if people start saving early, it means they’ll have to make less of a weekly contribution than people who start in their forties or fifties. That may allow them to balance saving for a pension with other goods, like holidays.
On the point about public pensions, that’s a bit like the point on company schemes I answered above. Where there’s a company scheme that’s as good or better than Personal Accounts, the company will be able to enrol people into that instead.
Comments
Robert Paul Martin wrote:
My concern about Personal Accounts which have automatic enrolment is that people will have no idea whether it is in their interests to do so. Naturally, people will assume that they will be better off in retirement, but unless means testing is removed, that is not necessarily the case. Do you intend to produce a table showing what they can expect by paying into a Personal Account compared to what they can expect if they do not, taking into account means testing? After all you cannot expect people to buy something without knowing exactly what they will get for their money.
James Purnell responded:
This is a crucial point – you’re right that we will need to give people confidence about saving through Personal Accounts.
We think that it will pay to save in Personal Accounts, for the vast majority of people. That’s mostly because of the employer contribution – for every pound people put in personal accounts, they will get a pound from their employer.
We’ve done a lot of analysis on this, and we’ll publish it in the Autumn, so people can see for themselves if they agree.
But I think it’s also worth being clear about what the reasonable criteria of the policy is here. You talk about “people knowing exactly what they will get for their money”. But no pension system produces this – private pensions can go up and down with stock market variations; even state pensions vary if governments change the legislation, as happened with State Earnings Related Pension Scheme (SERPS) for example.
So, I don’t think the criteria is a certainty. Instead, I think we need to give people a reasonable expectation that they will be better off – and we think we will meet that because the vast majority of people will be better off, as long as their investments do OK. And, as you say, we need to give people information so they can make those decisions about saving as easily as possible.
AlanE wrote:
I don't see the point of introducing these personal accounts and then give people the choice to 'opt out'. Surely one of the problems at the moment is that young people don't think about pensions early enough? Won't this approach mean they will simply opt out to increase the amount in their wage packets?
James Purnell responded:
Thanks for your comment – essentially, you’re suggesting we go down the route of compulsion. We did look at this, but decided against it in the end. We thought that people should be able to decide not to save for a pension – for example, they might want to opt out for a while to save for a deposit for a house or pay off some debt.
But nor did we think the current purely voluntary approach would work.
So, we thought that automatic enrolment strikes the right balance. We think 6-10 million people will end up saving through personal accounts, and that will make a big dent in our under-saving problem.
And it’s also worth noting that people will be automatically re-enrolled every three years. So, if a 22 year old opts out, they’ll get re-enrolled at 25, 28 etc…
Paul Herring wrote:
How will the new plan – of me contributing 3 per cent of gross, my company contributing 4 per cent and the Government contributing 1 per cent – affect my current situation where I contribute 16 per cent, my company 5 per cent and the Government 4.5 per cent.
It appears that I'm going to be losing out somewhat here. Do I actually have to 'opt out' of the personal accounts in order to continue paying into my current stakeholder pension?
In addition the way things are being presented at the moment, it seems that this would be an ideal opportunity for businesses that currently offer more than 3% gross contributions, to cut them back to 3 per cent, and in addition that the government plan to reduce your contribution by 3.5 per cent - this cannot be right surely??
James Purnell responded:
All employees, from the age of 22 earning above around £5,000 will be automatically enrolled into either a personal account unless they already have access to a good workplace scheme such as the one you describe. That would mean you stayed in your current scheme.
We would certainly hope that employers didn’t use the introduction of personal accounts as an excuse to reduce the contributions they are making. And our research suggests that this number will be extremely small.
I agree with you that it would be regrettable if employers did cut back – but the truth is that there is nothing to stop them cutting back to nothing if they want to at the moment. We surveyed employers to ask their intentions around this – and they made clear that they saw their pension schemes as an important way of retaining and recruiting staff, and wouldn’t want to cut back on them.
The Government is committed to supporting those employers who are already providing good occupational schemes. That is why we have begun a deregulatory review to reduce the administrative burden of running such a scheme, whilst ensuring that their members are adequately protected.
The tax incentives offered by the Government to those saving in a stakeholder pension will remain unaltered by our reforms.
Alex Nicholas wrote:
My main worry is that employers currently offering generous contributions to occupational schemes may force employees into the government scheme and lower their contributions to the statutory minimum. This must be addressed if workers are to have confidence in the new scheme.
James Purnell responded:
Our research indicates that the extent of this “levelling” down effect is likely to be limited. Employers contributing more than 3 per cent said that they view their pension scheme as an important recruitment and retention tool that they want to keep. Preliminary findings from a survey of 2,500 employers indicate that of those employers who report that personal accounts would mean an increase in total pension contributions – Only just over 1 per cent who are contributing 3 per cent or more said they would level down.
Russell Morton wrote:
On the subject of 'forced' pension contributions.
Please consider that there are many of us on very low or non-existent incomes for whom any deductions from pay will only lead to financial hardship. There surely would have to be a minimum salary level involved?
From my personal experience searching for work in the Blackpool area over the last four months it looks like the only jobs on offer are on the basic minimum wage – age and experience count for nothing around here. You cannot pay a mortgage and household bills (utilities) on the minimum wage – or on Jobseeker's Allowance !!!
Tks+Rgds, Russell
James Purnell responded:
You’re right – there will be a minimum salary. Those earning less than £5000 per year (roughly) would not contribute. And you would only contribute on the proportion of your income above that – so, if you were earning £10,000 a year, your contributions would be roughly £4 per week.
And if you didn’t think that was affordable, you could opt out. However, if a person doesn’t save for retirement they could end up with an income equivalent to around £114 a week. For many people such a substantial drop in income on retirement would be unacceptable – they have an incentive to save for retirement and our proposed reforms will enable them to do this.
Mr Dave Jones wrote:
Who are the people you are trying to encourage to save? Those people on low incomes? People who simply do not consider there retirement options? Everyone?
The first group may find it difficult to save, because of the lack of surplus funds, so why should they save for something as intangible as retirement rather than, for example, the next holiday.
The second group may have sufficient income to enjoy life. Again why save?
If your intention is everyone, then what about public servants (I'm one) who already pay contributions to a company pension? I assume this is another group who will opt out.
So there are three groups I've quickly outlined who will opt out of Personal Accounts. What single thing can make them change the habits of a life time and save for retirement when for to long the state has provided a safety net!
Personally I'm looking to supplement my state pension, but by doing that my extra 'income' is taxed. Not much encouragement is it?
James Purnell responded:
Without reform, millions of people could face unexpected and unwelcome drops in their income in retirement.
Latest DWP estimates suggest that at least 7 million people are undersaving. So that is our main target for these reforms – people on low and medium incomes who are not currently saving at all (or enough) for their retirement.
The single thing that we think can make a difference is automatic enrolment – we think it will mean many more of those 7 million saving. And if people start saving early, it means they’ll have to make less of a weekly contribution than people who start in their forties or fifties. That may allow them to balance saving for a pension with other goods, like holidays.
On the point about public pensions, that’s a bit like the point on company schemes I answered above. Where there’s a company scheme that’s as good or better than Personal Accounts, the company will be able to enrol people into that instead.