Gov't under fire for means-testing modelling
UK - The pensions industry has attacked assumptions used by the government in a report which concluded 95% of people will be better off saving when auto-enrolment is introduced in 2012.
In the report, published yesterday by the Department for Work and Pensions (DWP), findings suggested there was no "readily identifiable group in the working-age population" who would not, on average, get back more than they put into a pension. (See earlier IPE article: Gov't claims auto-enrolment will benefit 95%)
Niki Cleal, director of the Pension Policy Institute (PPI), acknowledged the findings from the DWP report were "broadly consistent" with the think tank's own research on the issue as it showed "a minority of people will not get back the value of their own contributions after taking account of inflation due to the interaction of their saving with means-tested benefits".
Hwever, Cleal warned this could have a "detrimental impact on wider public confidence in the pension system", and added the government's conclusion - that most people would be better off by saving, with many getting more than double what they save - "needs careful interpretation".
She said: "This finding is based on a specific set of assumptions which may, or may not, transpire in the real world. All individuals who save in money purchase pension schemes are exposed to the risk that the value of their pension pot can go down as well as up."
Consulting firm Watson Wyatt also said the 5% of people who will not be better off by saving only relates to those who do not get back what they pay in, and does not include people who do not get back the full value of contributions that employers pay on their behalf.
Paul Macro, a senior consultant, said: "The government should have said how often these employer contributions will simply subsidise the benefits system. In the case of very small employers, an individual's decision to stay in the pension scheme or opt out may have a noticeable effect on the overall wage budget. In these circumstances, the employer contribution should be included in any decision as to whether the individual has lost out."
The consulting firm also warned "some of the assumptions used in the report are questionable", as Macro claimed the government assumes people will get a real return of 3.5% a year from investing mostly in equities, which is then reduced by the impact of the benefits system.
Macro added: "After the events of last year, no-one should need reminding that equity markets are volatile and that some groups of savers will get much less lower returns than this. This is also pre-empting the decision on how personal accounts will be invested, before any formal consultation is even launched."
Joanne Segars, chief executive of the National Association of Pensions Funds (NAPF), said: "If personal accounts and auto-enrolment are to be successful, the government must work hard between now and their launch in 2012 to rebuild confidence in retirement saving. This must not only include communicating the benefits of retirement saving to those for whom it does pay to save but also identifying those who will not be better off and then providing appropriate advice to them. It is important to ensure that public confidence in pensions is not further undermined."
Standard Life has also claimed the report "fails to make it clear that people who save will be better off" as it warned the study does not acknowledge many employers may plan to pass the cost of employer contributions onto employees through lower wage rises, or wage freezes.
It pointed out in these cases where employees end up paying the whole 8%, "the advantages from saving are less clear, particularly for those in high risk groups such as older workers, and those receiving housing and council tax benefits".
John Lawson, head of pensions policy, said: "The government should signal now that means-tested benefits will be scaled back and that it expects current workers to save for their own future. As things stand, the message is too vague - the government needs to be clearer to people what they should expect from the state when they retire."
Helen Dowsey, principal at Aon Consulting, also added: "Regardless of the appropriateness of the assumptions used, there is still a degree of uncertainty affecting those on lower incomes where some savers may merely be replacing means-tested benefits leaving them no better off. The means testing debate could prove to be a red herring since there is no guarantee that the current means-tested benefits arrangements will be around even in five years, let alone 30 years.
"We urge the government to consider exempting pension savings from means testing because this will prevent many low earners from using this as an excuse not to divert scarce resources towards pension savings," she added.
AEGON, the life insurance firm, said while it "strongly believes it is in the best interests of most people to save for their retirement", the insurer warned people "shouldn't base their decisions solely on the figures, as the underlying assumptions used might not be relevant to their circumstances".
Rachel Vahey, head of pensions development, said: "We need to move away from viewing this purely as a number-crunching exercise. The government and the industry now need to consider what actions we can take to simplify the way the benefit system interacts with savings. Pension saving needs to be an instinctive positive choice, rather than a decision to be struggled over."
Financial adviser Hargreaves Lansdown said it was "regrettable" some people would lose out through means-testing but instead suggested a number of solutions including increasing the trivial commutation limit, and introducing a pensions disregard. However the DWP rejected some of these solutions in its report for adding complications and resulting in "generally significant" costs to the taxpayer while being "poorly targeted".
At the same time, John Jory, deputy chief executive of B&CE Benefit Schemes, said: "The government is doing no-one any favours by trying to sweep the means testing issue under the carpet. There are various measures that could be taken to radically reduce the number of people who could lose out. We urge the DWP to investigate these solutions, rather than taking the easier route of only focusing on the majority who will be better off."
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