New Pensions Plan Is More Good Than Bad

Critics have attacked the government's plans for personal pensions, but the scheme has some plus points.

So the Government finally publishes a halfway decent proposal for pensions reform and guess what happens?

That's right, pundits and analysts queue up to gleefully rip the whole thing to shreds.

The DWP's new report on how pensions reforms may affect financial incentives to save was lashed both by national newspapers and pension campaigners, led by the doughty Ros Altmann.

"This pension fudge is doomed to fail", moaned one headline, while Ms Altmann condemned it as a "whitewash" and "fundamentally flawed".

But are the critics right?

Personal accounts

From 2012, everybody with a job will be automatically signed up to their company's pension scheme and pay a minimum 4% of salary.

Their employer will add another 3%, and tax relief a further 1%. So for every £1 an employee invests in the scheme, they get another £1.

With a total 8% of salary going into the scheme, it adds up to £167 a month for somebody earning £25,000 a year. Which is £167 more than many people are investing now.

The new personal account should apply to every employee aged between 22 and state retirement age who earns more than £5,035 a year.

Given the fact that we are all living longer, saving less, and expecting a long and fun loving retirement, the more we put away the better.

Especially since the state will no longer be able to afford adequate pensions for our ageing population.

Most people agree with that, but then the quibbles begin.

A very mean test

Inevitably, the biggest complaint about personal accounts concerns people on low incomes.

Critics fear these workers could pay 4% of their salaries into the scheme, money they desperately need today, only to be robbed of state benefits by the means test when they retire. This will leave them in the same position as if they hadn't saved a bean.

When people realise this, the entire scheme will come into disrepute and people will flee in droves.

That's what the critics say.

And another thing

There are other criticisms. Ros Altmann says government figures assume personal accounts will be 80% invested in equities and deliver a healthy 5.1% return above inflation. If returns fall short, they won't even get back £1 for £1.

She also points out that the employer contribution is treated as a "tax" that will simply replace government means-tested benefits later.

These last two points don't completely convince me. True, 5.1% above inflation is on the high side, given that between 1997 and 2007 equities delivered just 4.1% in real terms, according to the Barclays Equity Gilt study. And between 1967 and 1977, they fell -2.8%.

But they outperformed in 1987-97 (13.8%), 1957-67 (11.9%) and 1947-57 (13.3%).

So anybody who invests in a personal account is taking an investment gamble, but no more so than when using any other savings vehicle that shoots at the higher ( but more volatile) long-term returns offered by equities.

And yes, it's true the employer contribution will simply replace government means-tested benefits later, but then, something has to, because the taxpayer won't be able to afford it.

Pensions nirvana

But the critics do have a point about means testing. Few things can be more unfair than pushing someone into saving with one hand, then robbing them of state benefits with the other.

Altmann's solution is simple: to abandon the means test, and pay everyone a decent liveable basic state pension instead. So any savings can be kept on top of that.

It's a great solution, clean and rational, and who knows, one day we may be able to afford it.

But right now, that prospect isn't on the table (although that could change, by the time people buy an annuity with the money in their personal accounts.

Silent majority

The new personal accounts have their faults, I'll admit that. Some people on low incomes may be better off opting out, which, by the way, they are perfectly entitled to do.

That's if they want to throw themselves at the mercy of future state benefits, which are likely to be even more miserly than today.

To completely rubbish personal accounts because a minority may lose out overlooks the fact that for most people, they will be a dramatic improvement on what we have now.

The plan will push millions more into saving extra for retirement, and that has to be a good thing.

And yes, I know they won't be anything as luxurious as the fur-lined pensions that MPs have voted for themselves (as campaigners are fond of pointing out), but that's an entirely different battle.

My verdict? The government wins on points.

More: How Saving For Your Pension Will Get Easier