Yorkshire Post – A dangerous cuckoo in the NEST
by Dr. Ros Altmann
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THE Government’s new name for the personal accounts – ‘NEST’s – may have caught some headlines, but the dangers remain. The image of a nest egg is misleading, because so many will find their ‘nest’ is empty, as they have saved merely to replace means tested benefits they would otherwise have had and end up no better off at all.
The risk to existing workers’ pensions is also being ignored, as employers cut back towards the three per cent minimum, when they are almost all contributing far more than that at the moment.
The project should be put on hold, it is dangerous and will contribute further to the destruction of our once-thriving pension saving culture.
Changing the name does not change the nature: Just calling them ‘Nests’ will not make them work any better.
Lower earners need the security of their future pension and should not be taking investment risks with that security. Pensions for lower and middle earners are not really about maximising investment returns. They are about providing security for their old age.
As the UK’s state pension does not provide adequate security (we have about the lowest state pension in the developed world), individuals are expected to try to do this for themselves, perhaps with an employer’s help.
But if the state pension system means-tests half of pensioners, then the lower and middle earners cannot safely save in a pension, for fear of losing much or all their future income.
Means testing penalties are being ignored. The Government has acknowledged this issue exists but has pretended it does not matter.
Investment and annuity risks are also serious threats to future pension outcomes, but the Government has failed to focus sufficiently on the dangers of disappointing investment returns or worsening annuity rates.
So why is this project still going ahead and why is there so much apparent support?
The answer is that there are powerful vested interests who stand to benefit in the nearer term from proceeding with this policy initiative, while the risks will fall on others who do not have a voice, for whom the dangers will only become obvious in the longer term. The groups who benefit are as follows:
- Politicians, who can claim they have ensured millions of workers are saving in a pension.
- The Treasury, which will watch workers saving to replace means tested benefits later.
- Large employers, who have spotted the opportunity to cut back contributions to three per cent.
- Financial companies, who will earn good fees on managing workers’ money each year.
What really matters to the workers is the pension they get out, but what really matters to the politicians, employers and financial industry is how much money is being put in.
Many workers who are automatically enrolled into a Nest without realising they should not be. Thesefuture pensioners are at risk of receiving very little from their contributions, because their NEST will merely replace means-tested benefits they would otherwise have received. So a worker earning £20,000 a year will be putting £50 a month into his or her Nest, and will assume that this means his or her future security is taken care of. But the amount workers will be required to put into their pensions will not be enough to provide much pension. Moreover, investment returns are not guaranteed and who knows what annuity rates will be in the future?
A further danger is that many employers will cut their pension contributions back to the Nest minimum (which is less than half of current average employer pension contributions), so those who are currently in an employer scheme would end up with less pension in future.
This levelling down effect is already starting, as the Government has given employers a new target to aim at – all they need to put in is three per cent. Hardly a surprise, then, that the CBI supports it, while Federation of Small Business does not.
The failure of policymakers and the pensions industry to take these dangers seriously is deeply depressing. We are watching pensions disintegrate, amid claims of hugely improving the situation!
If we do not abandon this project soon, we will waste even more money on a pension savings scheme that is not fit for purpose. There will also be administration problems with tracking tiny pots of money for workers who forgot to opt out in time and whose money is locked away for decades by the pension system.
And, furthermore, if Government is honest about the risks, most younger people will be put off.
If the Government, however, is not honest about the risks then future taxpayers may end up funding compensation claims from workers who will explain how the Government misled them about the value and security of their pension savings.
We need a proper radical overhaul of the state pension system, to provide a basic, non means-tested residents’ pension: This would pay a decent basic minimum, as of right, to all citizens without mass means-testing.
Once we have made it safe for people to save, it should be up to them to negotiate whatever help they can get from their employer to help fund long-term savings for their future.
There is no certainty about long-term investment, there is no magic that can transform small contributions into big pensions. It can happen, but it may not. People have to understand the uncertainty and the risks and then they may have to save far more, or plan to work longer, in order to fund the lifestyle they might want in later life. But leading them to believe that the NEST will provide them with retirement security is misleading and risks further pensions disappointment in years to come. The sooner we are honest about pensions the better for all of us.