Pensions Bill shuffles the deck chairs

Millions of Britons aren't putting enough by for retirement, says Melanie Bien. The latest reforms will do little to change this

Pension providers have slated the Pensions Bill, published last Thursday, because it will do little to encourage us to save more for our retirement.

The National Association of Pension Funds (NAPF) admits that "few could argue with the spirit of the measures proposed", which will be implemented by 6 April next year. But it goes on to complain that, as it stands, the Bill has not succeeded in simplifying the "archaic state pension system", and that it provides no incentives for companies to offer decent pensions to employees or to keep existing schemes open.

"Is there any real long-term vision, or a clear pension strategy to achieve that vision?" asks NAPF chairman Terry Faulkner. "Regrettably, the answer is 'no'."

Research from the Consumers' Association (CA) shows that half the population are not currently contributing to a pension, and four in five of these people have no plans to acquire one in the future. So it is worrying that the Pensions Bill has made no effort to close the savings gap.

With its focus on the introduction of a pension protection fund (PPF) to protect members of final salary schemes and a pensions regulator to focus on underfunding, fraud and maladministration, the Bill will address some problems that need urgent attention. But it simply doesn't go far enough.

"On its own the Pensions Bill will not help to stimulate or grow the pensions market," says Stephen Mann, strategic development director for Norwich Union. "We need clear incentives to drive forward the pensions market and encourage people to save for their own retirement."

The Bill could even end up having the opposite effect to the one the Government intends, according to Jeremy Willmont, partner at accountancy firm Moore Stephens.

"This Bill won't encourage people to save more money," he warns. "Instead it will encourage a few more employers to close their final salary pension schemes."

The PPF will protect members of final salary schemes if their employer goes bust by offering them financial compensation. At the moment, if your employer goes out of business, taking your final salary pension with it, you are likely to lose the lot and be left facing a bleak retirement.

The Government's hope is that the PPF will restore the trust of consumers in the pensions industry. But Mr Willmont believes that as it will be partly funded by risk-based levies on employers, and since those running poorly funded schemes will eventually be charged proportionately more than well-funded ones, the PPF will put unbearable pressure on employers which are already struggling.

"Employers in the most financial difficulty will have to pay extra levies which may push them over the brink into insolvency," he adds. "Their employees' pension benefits accrued to date will be protected by the PPF, but this will be scant consolation to these employees if they lose a job which would have provided a salary and much greater pension benefits if they had been allowed to continue to work until retirement."

To make matters worse, details of how the risk-based portion of the levy will be calculated have not yet been revealed by the Government. Neither has the cap on potential compensation payable to those who claim on the fund. This makes it difficult to tell whether the PPF will be properly financed, even though the funding is crucial to its success, points out Stewart Ritchie, pensions development director at Scottish Equitable.

What we do know is that a flat-rate charge will apply for the first year of the PPF's operation. It will then revert to a variable levy calculated according to the funding level of the final salary scheme. Well-funded schemes are less likely to claim on the PPF, so fairness dictates that they should pay a lower levy than less well-funded ones or those which have adopted high-risk strategies. But this does mean that poorly funded schemes will find themselves under even greater financial pressure.

The Government has also resisted calls for it to back the PPF financially - a decision criticised by the CA, which describes the Bill as "half-baked".

"We are concerned by the Government's reliance on the financial services industry to solve the pensions crisis on its own," says Mick McAteer, principal policy adviser at the CA. "The Government is transferring too much of the risk for the provision of decent pensions on to individual consumers."

The PPF is also criticised for not being retrospective: those pensioners whose employers have already gone bust won't get any compensation.

Brendan Barber, general secretary of the TUC, says: "Collective insurance is the sensible way to protect pensions. But those employees who have already lost out should not be forgotten. Many employees were contractually required to join their occupational pension and were made a specific pensions promise by their scheme, which has now been broken. They should be compensated."

Steve Webb, work and pensions spokes- man for the Liberal Democrats, goes further: "There is nothing in these proposals to help the tens of thousands who have already lost all or part of their promised company pension. The Government has a moral duty to compensate them."

Labour's proposals to protect our pensions

* Employees who are members of final salary schemes will gain improved security through a new pension protection fund (PPF). A PPF Ombudsman, pensions regulator and pensions regulator tribunal will also be established.

* Company pension schemes will be simplified, making them easier for employers to administer.

* While there will be no extension of the retirement age from 65, there will be financial incentives to encourage people to delay drawing their state pension.

* There will be greater promotion of the benefits of pensions. The Government will set up an online retirement planner, and employers will be required to provide staff with access to information on pensions, as well as advice in the workplace.

Source: Department for Work and Pensions