Millions are sleepwalking into old age poverty
This is the stark warning from Tim Jones, the man charged with making us save for retirement. He talks to Julian Knight
Sunday 24 July 2011
Mission impossible it has been called, but from next year it will be Tim Jones's job to persuade the estimated 12 million Britons who are not saving anything to forgo comforts – or even necessities – and actually put money away for their retirement.
It's no understatement to say that it will be partly up to the quiet, unassuming former NatWest banker to change us from a nation hooked on the drug of consumerism and the here and now, to one abiding by the older and largely forgotten values of saving and thrift. Tim Jones, 56, is the head of Nest (which stands for the National Employment Savings Trust) and it's his job to oversee the biggest overhaul of British pensions in our lifetime. Whether you live a retirement of poverty or comfort may well be down to him.
From October 2012, millions of British workers will be auto-enrolled into either the pensions scheme run by their employer, or Nest, run by Mr Jones and his team. Eventually, hundreds of billions could be invested in Nest.
"It's a fundamental change and a huge challenge," says Mr Jones. "Over the next few years we will have the employees of 1.3 million UK firms, big or small, being enrolled into a pension scheme automatically."
The first that most employees will know of their new pension will be when they see money being taken from their salaries to pay for contributions into Nest. It will start with 1 per cent of salary in 2012, but, by 2017, 5 per cent of pre-tax income will be drawn from millions of salaries.
"We have tried to phase it so that there is not too much economic damage with people suddenly seeing a large slice of income disappearing from their pay packet," he said. "But the good thing is, for the first time millions of Britons will be saving for their retirement."
As for preferring auto enrolment rather than allowing people to make the choice to join Nest, Mr Jones is unapologetic. "Simply put, trying to persuade people to join a pension has failed in this country, and as a result we have millions of people sleepwalking to a really bad place in old age. Taking the decision out of people's hands means that they don't have to deal with the jargon – which they detest – and down the line they can become engaged, particularly when their pension pot reaches a landmark like £5,000, £10,000 or £15,000."
Once they have been enrolled, people will be allowed to stop their contributions at any time. However, Mr Jones is not in favour of people being allowed early access to their fund. "The money should be only for retirement. Some argue that if you were about to lose your home you should be able to dip into your pension pot, but that will probably only give you a couple of months' breathing space. At the end of it you'll still lose your home but no longer have a pension."
A more serious criticism of Mr Jones's scheme is that it will lead to other established workplace pension schemes cutting their contribution levels to the much lower percentage of Nest – a process dubbed "levelling down". Recently, this newspaper reported that a host of employers were poised to do just this, but Mr Jones denies this.
"Look, we have no evidence that firms are going to cut their contributions in response to the launch of Nest. But what we do know is that several big employers, such as retailers, are looking to put their lower-paid during, say, the first two years of employment into Nest rather than into the standard company scheme. However, the plan then is to move these people into the established scheme after two years."
But isn't even the risk of levelling down enough to make Nest a game not worth the candle? That once employers start to cut their contributions into their established scheme it will already be too late, and a race to the bottom will ensue?
"If employers do that, then they may find that they may not attract the calibre of staff that they need. The important thing is to remember that we are talking about getting millions of Britons into a savings habit they have never had."
Yet, with contributions of only a few per cent of salary, the fear is that Nest won't make much of a difference, that it will provide only a small pension pot, just enough perhaps to bar people from collecting state benefits but nowhere near enough to be comfortable in old age.
"If you're in your forties and you start paying into a pension through Nest for the first time, then, yes, sure it's not going to be anywhere near enough. But the idea is to catch people young, get them in the habit, and, for those older contributors, they can look at increasing their own contributions so they have a better chance of funding a better retirement."
But what about the poor performance of pension funds in recent years? "Nest will work in a completely different way from a normal pension. Investment risk will vary according to age, with members in their twenties placed in safe investments, those in their thirties, forties and early fifties in riskier areas, then in the 10 years leading up to retirement people's pensions will be invested back in safe areas.
"The big idea is that people when they start out aren't put off because they may suffer a few losses. Faith has to be restored in savings and that's what we are about."
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