Research backs new pension system

Lord Turner's Pensions Commission proposed major changes

A new national pension system, to be launched in 2012, will benefit almost everyone who saves in it, according to a government report.

The new scheme, called personal accounts, will top up payments from the basic state pension.

It will use automatic enrolment to persuade millions of workers to save.

The report was welcomed by consumer groups and the TUC, although some analysts warned of over-ambitious assumptions in the government research.

The 142 pages of research and analysis by the Department of Work & Pensions (DWP) suggest that almost everyone will be better off in personal accounts, even if they then lose entitlement to some benefits.

"Even after inflation, virtually everyone can expect to get back more than they put away," said the minister for pensions and the ageing society, Rosie Winterton.

"The research confirms that we are absolutely right in moving forward with the recommendations of the Turner Commission and the decision to introduce auto-enrolment in 2012," she said.

However a warning note was sounded by the Pensions Policy Institute (PPI), which said the government's conclusion needed "careful interpretation".

"This finding is based on a specific set of assumptions which may, or may not, transpire in the real world," said Niki Cleal, PPI director.

"All individuals who save in money purchase pension schemes are exposed to the risk that the value of their pension pot can go down as well as up," she added.

New system

The new system of personal accounts will be targeted at about five million workers who are in inadequate employer schemes, or none at all.

PERSONAL ACCOUNTS EXPLAINED Employees compelled to join the scheme, unless they already have a good workplace pension or choose to opt out Contributions will be paid on earnings between �5,000 and �33,500 p.a. There will be an annual ceiling on total contributions of �3,600 People will not be able to transfer funds from existing pension plans Contributions will be collected centrally and paid into a choice of investment funds Start date for personal accounts will be 2012 Personal accounts part of a wider pension shake-up involving a raising of the state pension age to 68

They will be recruited automatically though they will be able to opt out.

The DWP said the key findings of its research and analysis were that:

• More than 70% of savers could expect to get back more than twice the amount they put in, even after taking into account inflation.

• For more than 95%, the expected improvement would be greater than the cost of their contributions, even after taking account of inflation.

• There was no "readily-identifiable" group in the working age population whose members could not, on average, expect to get back more than they put in to a pension.

The new top-up system will sit alongside the gradual raising of the state pension age, and the restoration of the policy of raising state pensions in line with earnings rather than inflation, as a major reform of pensions in the UK.

The idea of personal accounts was first proposed in 2005 by Lord Turner, after his Pensions Commission published two major reports into ways of increasing the number of people saving adequate amounts for their retirement.

Contributions from workers, employers, and the benefit of tax relief, will see money saved in conventional investment funds, like those which are used to finance money-purchase, or defined contribution, pension schemes in the private sector.

Benefits

A key concern about the new scheme has been the extent to which some poor people might lose entitlement to various means tested benefits if they saved more for a pension, and whether or not this might deter them from taking part.

After the events of last year, no one should need reminding that equity markets are volatile and that some groups of savers will get much less lower returns than this Paul Macro, Watson Wyatt

"Although there have been concerns about the interaction between pensions and means-tested benefits, the vast majority of people should benefit from saving after the 2012 reforms," said Gordon Lishman, Director General of Age Concern.

Doug Taylor, Personal Finance Campaigner at Which? said: "Personal Accounts remain a good option for consumers, but their interests must remain at the heart of this scheme, to ensure a first-class pension saving plan is in place in 2012."

And the DWP report was welcomed by TUC general secretary Brendan Barber.

"This rigorous research shows that the great bulk of people are likely to be better off in retirement when auto-enrolment into an employer scheme or a personal account starts in 2012," he said.

But the actuarial firm Watson Wyatt said that the report understated the impact that means-testing of benefits could have on the returns on pension saving.

"The government assumes that people will get a real return of 3.5% a year from investing mostly in equities - and that this is then reduced by the impact of the benefits system," warned Paul Macro of Watson Wyatt.

"After the events of last year, no one should need reminding that equity markets are volatile and that some groups of savers will get much less lower returns than this," he said.

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