Talking incentives to save
Last week, I hosted a seminar looking at the issue of financial incentives to save for people when we introduce personal accounts in 2012.
The seminar was chaired by Lord Turner – the former head of the Pensions Commission – and attendees included a number of leading academics in this field, representatives from the pensions industry and several familiar faces from the Pensions Bill Committee, including David Laws, Nigel Waterson and Sally Keeble. Terry Rooney, the chair of the Work and Pensions Select Committee, also attended.
The purpose of the seminar was to look at future entitlement to Pension Credit and likely returns on saving under our proposed reformed system – and what they mean in terms of the financial incentives people will have to save in a personal account. It’s an issue which we’ve discussed before on this blog.
Using analytical modelling tools, we have been able to look at the returns people might get from saving, subject to certain factors such as when they start saving and their income – and of course investment performance.
At the seminar we set out the main conclusions that we’ve drawn from this work. We think that our plans to automatically enrol eligible employees into personal accounts are justified by the fact that the large majority of people can expect a good payback on their saving.
We estimate that someone saving over a full working life could expect around £2.50 payback for every £1 they invest in a personal account. Of course, as with all investments, this will depend on stock market returns and other risks. However, we think this will represent a good incentive to save in personal accounts.
We expect entitlement to Pension Credit to fall as a result of our reforms. But in any case, the crucial conclusion we’ve come to is that entitlement to Pension Credit does not mean that people will get poor returns from saving.
Most people who qualify for Pension Credit in retirement will see a positive return on their saving – many long term savers could expect as much as around £2, plus inflation, for every £1 that is saved in a personal account. That represents a good incentive to save.
Of course, automatic enrolment is not compulsion. There will always be some individuals who will choose, rightly, not to save. And most of those at the seminar agreed that it will be vital that the supporting information around personal accounts helps people to make that choice.
But alongside the detailed statistical analysis of returns, I think there is an important point of principle here about encouraging personal responsibility for income in retirement. The message we should be giving to individuals is that saving for retirement (and for other things) is basically a good idea. The alternative for the vast majority of the target population is a very real risk of living on a greatly reduced income later in life – and that’s what we’re working to prevent.
RSS 2.0 feed for these comments.
This entry was posted on Monday, February 26th, 2007 at 1:58 PM by James Purnell and categorized in General posts.
Valerie Dixon wrote:
re your blogs, could some one inform me how some one on low income afford to put away savings and still pay their every day bills, I worked again after my children were old enough to be left and I managed to get a job that had a pension which I paid into, but my state pension is not a lot as I was a stay at home mum, but I was lucky to have paid in a full stamp while I did work. Instead of pension credits would not it be better to pay a better state pension and people like me pay tax on works pension any way so the goverment would get some monies back.
Posted on 01-Mar-07 at 1:25 pm | Permalink
Jim Tulip wrote:
Dear James Purnell
In your blog “Talking incentives to save” on 26.2.07 you said, “I think there is an important point of principle here about encouraging personal responsibility for income in retirement. The message we should be giving to individuals is that saving for retirement is basically a good idea”.
I wholeheartedly agree with this principle as you have stated it. But how can you reconcile the principle with your proposed treatment of class 3 N.I. contributors?
I think everyone would agree that class 3 is a form of saving, because it is VOLUNTARY; and that probably, if given the choice, individuals should save to secure their Basic State Pension as first priority, before considering other forms of saving for retirement. I have been doing exactly as you wish since 1991, i.e. saving via class 3 conributions each year so as to build up to the 44 qualifying years to get the full BSP, rather than just a proportion of it. But under your Pensions Bill as it now stands, I would need only 30 years for the full BSP, which means that I have paid 8 years’ class 3 unnecessarily - that is £5600 down the drain. I have done as you wish and taken “personal responsibility for my income in retirement”, but it has left me looking and feeling extremely foolish.
If your Pensions Bill becomes law, it will mean for most class 3 contributors that saving for retirement has turned out to be a bad idea, not a good one. And as it becomes known what a mismatch there is between your rhetoric and your actions, it will undermine confidence in your proposals generally, and therefore in individuals’ willingness to save.
Pleas will you address this issue? How can you justify not refunding (with interest) wasted class 3 contributions?
Yours sincerely
Jim Tulip
Posted on 02-Mar-07 at 3:48 pm | Permalink