Pension Plan Problem
Four years after the Government set up the Pensions
Commission, and a year after its final report, the Government has finally
published its plans to ensure that as many people as possible pay into a pension
through their job, writes Paul Lewis
At the moment about seven million people in work do not pay into a pension apart
from the state pension. The Government is setting up a new National Pension
Savings Scheme to make sure they do by (a) automatically enrolling them in the
scheme into which they will put 5% of their gross pay and (b) compelling
employers to pay at least 3% of their gross pay into that scheme.
The new system will not start until April 2012 and the employer’s contribution
will be phased in so will not reach 3% until at least April 2014 – more than
seven years from now and 12 years since the Government set up the Commission on
whose work it is based.
Considering all this work and thought – or at least time – there are two major
problems with the proposals from the Government.
First, for people on lower incomes it may not be worthwhile to save up for a
pension, as their gain will be relatively small. At the moment half those over
60 are entitled to claim a means-tested top up to their pension called pension
credit. And a similar number can claim means-tested help with their council tax.
Even when the system has been working for 25 years, in 2040 the Government says
one in three people over 65 will be entitled to claim means-tested help. Losing
those means-tested benefits is like a tax – in this case cutting their income by
60p for every extra £1 from their pension. Some will lose 100%. Hardly an
incentive to save.
Second, the contribution from employers is too small. Decent pensions which are
a proportion of your pay cost employers around 16.5% of pay. Many have traded
down to the less costly funded schemes with no guaranteed pension into which
they pay less than half as much – an average of around 7.5% of pay. The new
scheme more than halves the employer’s contribution again to 3% of pay. And the
temptation of many employers who already pay 7.5% into a scheme will be to
replace their scheme with the new one, cutting their contributions to 3%.
The White Paper published this week does not address either of these two
problems. Until it does, it will be a flawed plan.
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