James Daley: This pension fudge is doomed to fail

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The Independent Online

In three years's time, everyone who has a job in Britain is going to be automatically signed up to their company pension scheme (or a national pension scheme if their company doesn't have one), into which a minimum of 4 per cent of their salary will be paid each month. Their employer will then be obliged to pay in at least another 3 per cent, while a further 1 per cent will be added via tax relief.

Although everyone will have the right to opt out of their pension if they wish, the hope is that most people won't bother – and that, within a few years, almost everyone in Britain will be on their way to building up a decent-sized fund to pay for their retirement.

The idea is a good one. At the moment, far too many people don't take the issue of saving seriously enough, perpetually putting off the decision to join their company pension because there are always more pressing calls on their cash. But, with life expectancies increasing, it's all the more important that people start saving as early as possible. If current levels of pension saving continue, the Government will end up with a substantial proportion of the population on benefits in retirement – a bill it won't be able to afford.

Although its new plan should go a long way to avoiding this, there's one serious glitch in the policy. For people on relatively low salaries, there's a chance that saving into a pension won't leave them any better off in retirement than if they'd saved nothing and picked up their full entitlement to state benefits.

For a long time, James Purnell, the Work and Pensions Secretary, denied that this was a problem – in spite of many reports from reputable think-tanks that proved the contrary. But eventually, his department agreed to at least look at the issue. This week, it published its lengthy response – a report that naturally made the case that all but a very small minority would be better off from saving.

Nevertheless, the report conceded that there would be people who will be no better off. Add this to the many more who will be only marginally better off, and you're left with several million people who'll reach retirement resenting the fact that they ever bothered following the Government's advice.

If the Government is to push ahead with its pension plan, it simply must ensure that those who save are significantly better off than those who don't. And the only way to do that is to increase the basic state pension to an amount that's enough to live on, out of poverty. This would do away with the need for means-testing in retirement – and would ensure that everyone who saved would have more money in retirement as a result. Although the Government continues to argue that this is unaffordable, there are numerous ways in which such a plan could be funded if the Government was willing to consider a bold, radical restructuring of the way it pays for people's pensions.

As it stands, however, I believe its new pension plan is doomed to fail – and has the potential to snowball into a massive mis-selling scandal in 30 or 40 years' time. By that time, however, Mr Purnell will be long gone, enjoying a lavish ministerial pension that most of us can only dream of.

j.daley@independent.co.uk

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