Julian Knight: This pensions carry-on is no laughing matter
The fledgling Nest scheme will not get the chance to fly unless ministers commit to overall reform
Sunday 29 January 2012
What a carry on! In the same week as the big advertising campaign for the new all-singing and dancing Nest scheme is rolled out, the Government announces yet another delay to the full implementation of its workplace pension reforms.
We will now have to wait until 2018 – a staggering 14 years after the idea was proposed by Lord Turner – for all employers to be compelled to pay money into their workers' pensions. Yet again, ministers have bent to business claims that having to auto-enrol employees into a pension – even the low cost Nest scheme – and making a small contribution will hurt them and job prospects.
Of course, it's difficult to resist such calls as the economy sits precariously on the edge of a possible double-dip recession but really the Government needs to be braver if it truly believes in auto-enrolment, Nest and employer contributions.
And that's part of the problem. The so-called consensus on pensions across government and the opposition is weak.
I don't think this latest delay comes from the Lib Dem side of the coalition, but from the Tories. In the run up to the last election they were dismayed that Labour rushed through its Nest legislation and wanted time to make it more business friendly.
It's a shame that Steve Webb, the pension minister, hasn't been able to resist the gradual putsch from the Tories. And we are not finished here, who is to say there won't be further delays – despite government assurances. Remember the next election is only three years away.
This delay worries me because some of the necessary changes which have to happen to make Nest work may also suffer the same fate. For the scheme to work as intended we need the following to happen:
First, means-tested pension benefits have to be scrapped and replaced with a more generous flat, universal pension. If this doesn't happen then people who save into Nest – even relatively large amounts – will lose much of it by being barred from these benefits. No adviser worth his or her salt will advise most people to invest in Nest if these benefits are still in place.
Second, contributions have to be higher than the minimum. Put simply, if you save the minimum in Nest for 10, 20, or 30 years its likely to give you a very small amount of cash, particularly when spread over a post-work life which could span four decades. And, with further delays to employers making their tiny contributions, it's going to be even harder to build up a decent pension. Ultimately, I imagine most will be disappointed with their Nest-egg unless the message on how much to save is sufficiently loud.
The threat of levelling down is also a massive concern. I can see that over time employers with more generous schemes will reduce what they pay to Nest minimum levels. So, if you get 5 or 10 per cent of salary from your employer at the moment you could see that slashed to a paltry 3 per cent. Mr Webb admits this will happen with new joiners, so firms that now have good pensions will soon have a two-tier system. And, as we saw during the dismantling of private-sector final-salary schemes, the lower benefits given by new joiners will eventually be foisted upon longer serving staff.
Nest may "level up" millions who currently don't have a pension into a scheme which won't yield enough, but "level down" millions who are saving hard and have a real chance of putting enough aside for their retirement. The uninformed and largely careless are raised up while the informed and careful are damaged. In some respects it's similar to what is happening in the wider economy where savers are suffering to the tune of billions to secure lower rates for borrowers who may have over-extended themselves.
The case for Nest is currently on a knife edge and it's absolutely no joke.
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