Personal accounts are "disaster waiting to happen"
UK - Automatically enrolling all employees into "tried and tested" products such as stakeholder pensions may be a better solution for extending pension coverage than "untested and inflexible state-controlled personal accounts", a think tank has claimed.
A report published by the centre-right think tank Policy Exchange, entitled "Quelling the Pensions Storm: Lessons from the Past", claimed the UK government "lacks ambition" in its pension reforms, and argued it is possible to provide future pensioners with a "more secure and prosperous retirement" through alternative proposals.
The report suggested the government could begin by reducing "the regulatory burden on private sector occupational schemes, encourage risk-sharing schemes and make public sector schemes more affordable".
It claimed this would provide more access to defined benefit schemes and more equity between different generations, as well as a more sustainable system.
Nicholas Hillman, principal author of the report and former member of the Joint Working Group which advises the government on pensions, pointed out the government's main proposal for extending pension coverage is to introduce automatic enrolment into a new system of personal accounts, which "may well turn out to be a poor solution to the problem of low saving".
Instead, the author argued if existing products - such as stakeholder pensions - were used instead, automatic enrolment could be implemented much more quickly, and would encourage "a more dynamic market in retirement saving".
The report admitted the current state pension reform proposals are an "improvement on the status quo and opposition parties and the pensions industry are right not to oppose them outright".
But the research warned the proposals would "do little to simplify the system" and will continue to provide "an uneasy base for private saving", as it argued the reform programme needs to be "more radical" if it is to be a success.
Hillman added: "Over-regulation, rising longevity and extra costs have conspired to produce the perfect storm in pensions. There is next to nothing to encourage employers to provide generous pensions and personal accounts are a disaster waiting to happen because the implementation risks are so enormous."
He pointed out "quelling the storm will need three changes", including braver deregulation for private occupational pensions, and lower costs for public sector schemes.
"Secondly, instead of spending four years designing an entirely new system of personal accounts, employees should be automatically enrolled into existing products.Thirdly, we should recognise that earnings-related state pensions do not work. A Single-Tier State Pension would be much more comprehensible than the current Basic State Pension and State Second Pension," added Hillman.
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