UK - The Pensions Policy Institute (PPI) has called on the UK government to provide more clarity on its goal of improving incentives to save for retirement, as research shows personal accounts could cause 20% of pensioners to lose 80% of means-tested pension benefits.

In its latest briefing note, entitled 'Incentives to save in a pension: a review of the PPI's research', the organisation highlighted recent research on the number of pensioner households facing marginal reduction rates (MDRs) in 2005 and then in 2050 - the point by which the government's proposed state pension reforms are expected to be well bedded-in. 

The MDR is the amount any small additional increase to private pension saving would be offset by a lower entitlement to means-tested benefits so, for example, a 40% MDR means if pension saving increased by £1 benefits would be cut by 40p so the overall gain is just 60p.

Research conducted by the PPI revealed the number of households facing MDRs of between 20-60% is expected to be lower by 2050, however, it suggested the proportion of pensioners who could lose 80% of their means-tested benefits will remain constant at 20%.

That said, the PPI pointed out its research is subject to a degree of uncertainty as the most accurate projection model for estimating how many people will be affected by MDRs, once auto-enrolment begins in 2012, belongs to the government's department for work and pensions (DWP).

The government announced last month it intends to publish work on the means-testing issue towards the end of 2008, once the current Pensions Bill - which introduces auto-enrolment into personal accounts and other trust-based occupational schemes - has been approved by Parliament.

It confirmed the work will "evaluate the evidence and consider interaction between pension saving and income-related benefits in a reformed system, and look at the incentive affects".

Ahead of the 'work programme' the PPI has highlighted some particular areas of focus for the analysis, including specific numbers of how many people will be affected, and how useful generic advice will be to employees.

The Thoresen Review has recommended a system of 'money guidance' be introduced which does not, at present, cover the system of personal accounts or auto-enrolment. (See earlier IPE story: Investment managers may pay for 'money guidance')

The PPI warned the government must be clear about the goals of any reforms which are designed to improve incentives to save for retirement, and must decide whether the aim is to "ensure good saving from saving in a pension for everybody, or just the majority".
It argued the government also needed to recognise "a series of trade-offs will have to be made in any solution" including the choice between increased returns from pension saving and increased costs to the taxpayer.
The paper added "clarity from the government about whether this is a priority for spending may help stakeholders find feasible solutions".

However, a spokesman from the DWP said: "We aim to build up a common understanding of the evidence base on savings incentives, recognising the balance we need to make between alleviating poverty and incentivising savings - and the cost constraints we face - within the overall Pensions Commission package."

"We welcome the PPI's contribution. But stakeholders agree that this is a long-term issue and does not need to threaten the overall structure and pace of the Government's pension reforms," added the spokesman.

The research in the briefing note follows updated figures on individual pension wealth from the Office of National Statistics (ONS) which showed 9.8 million people contributed to either a stakeholder or personal pension in April 2005.

However, just over half of the 5.9 million men, and two-thirds of the 3.9 million female savers had a total pension fund of less than £10,000, while the statistics showed the median value of private pension saving for men aged between 50-54 was approximately £75,000 compared with just £6,000 for women.

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