People living longer but not saving enough for later life is one of the biggest challenges facing society. Individuals must take personal responsibility by saving so that they can enjoy the type of retirement lifestyle they want.
These aspirations cannot be met through means-tested benefits, and no one should gamble on what the level of benefits may be in 20 or 30 years’ time. But about four in 10 employees are not saving into a pension – and, unless they do something about it, their inaction will hit them in the pocket when they retire.
Reforms in the current pensions bill will help to overcome the inertia that is such a barrier to saving by automatically enrolling people into workplace pensions from 2012. Workers will have the right to pension contributions from their employer for the first time. These changes will result in up to nine million people saving for the first time or saving more.
State benefits
Some critics have said that means-testing threatens the success of these reforms. One in six people currently works for an employer that auto-enrols, so this is not a new issue. But these reforms will significantly increase savings incentives and reduce means-testing. Most people stand to benefit from saving. The reformed state pension will provide a solid foundation for private saving. Indeed, under reform most people will be lifted above pension credit by the state pension alone. Someone who contributes throughout their working life could build up a state pension of around £150 by 2050.
As a result of auto-enrolment, every pound an employee contributes will be at least doubled due to the introduction of a mandatory employer contribution and generous tax relief. Department for Work and Pensions analysis shows that a median earner will be more than £2,000 a year better off by 2050 (2008/2009 price terms) than with no reform.
But we cannot eliminate the unpredictable nature of people’s lives. They may have an accident or suffer from long-term ill health; they may get into debt or become bankrupt; their family relationships may break down. In a humane society, we cannot throw people on the scrap heap in later life if things did not turn out as they had hoped – the state must provide a safety net.
Risky business
There is no question that, for most people, the dangers of not saving into a pension far outweigh the small risk of saving and later regretting it. Not saving is the real gamble. You will miss out on the more comfortable lifestyle and financial security that can only be achieved through saving. And you face the uncertainty of relying on a benefits system that might change substantially in years to come.
I appreciate that there are continued concerns about the effect of means-testing on savings incentives and we are examining these issues with stakeholder groups. A report will be published at the end of the year. But it is important that any discussion about improving savings incentives further is founded upon a firm evidence base – recognising the balance between cost, alleviating poverty and incentivising savings.
We hope this will promote a more informed debate. Many of the criticisms levelled at the reforms are misleading. Recent headline-grabbing comments by life assurance analyst Ned Cazalet is one example – if you examine the analysis, it emerges that Mr Cazalet’s attack is based on a simple fact that already applies to all pension savings. The longer you survive after converting your pension pot into a regular income, the more you benefit – but if you die just a few years after retiring, you see a lower return. This is not new or unique to personal accounts. His analysis shows people living just five to 20 years postretirement when the average life expectancy for both men and women reaching state pension age today already exceeds his most ‘optimistic’ range.
Mixed views
Other commentators have suggested that anyone on benefits is losing out – but the pension system is designed to reward saving and many on benefits will still be much better off in retirement than they would have been if they had not saved.
But while we are happy to examine the detail, I believe the framework we are putting in place for the future is the right one. It makes the state pension much simpler, more generous and fair to women and carers; it significantly improves savings incentives; it encourages personal responsibility and makes it easier for people to provide for themselves; it retains a safety net to prevent destitution; and it does not place unfair burdens on the taxpayer.
The message is simple – individuals should save, and save early. Means-tested benefits will not meet most people’s aspirations for later life. To suggest otherwise is to sell them short – and increases people’s chances that they will be poorer in retirement.
Mike O’Brien is minister of state for pensions reform
