From Beijing in 2008 to London in 2012 is but a short jump for pensioners

Published on Friday 22 August 2008 23:11

THE Olympics in Beijing seems to have dominated conversation in the last fortnight, whether it's the sport or the politics. It makes you wonder how the UK will perform in four years' time when it's our turn to host in 2012.

Another milestone scheduled for that year is the introduction of the government's national pensions savings scheme and, alongside it, new employer responsibilities. This makes the pensions bill, currently making its way through parliament, more of an employment bill. As this will take effect four years from now it's difficult to visualise how it will work in practice, but decisions being made now by government will have a big effect on our future lives.

The overarching aim is to improve people's retirement income. But many in the pensions industry are concerned it could have the opposite effect. Employers will have to automatically enrol their workforce into a pension scheme, and then pay at least a set minimum pension contribution for them. The worker will also have to contribute. But this isn't pension compulsion; if the worker doesn't want to be part of the pension scheme they can opt out, and then both the employer and worker pay nothing.

The government is casting a wide-ranging net.

All employers will have to do this, whether it is a company employing ten thousand people, a small coffee shop with just a few employees or a parent employing a nanny.

And the rules apply to the whole workforce – even temporary staff and possibly some contract workers will have to be automatically enrolled.

But, disturbingly, the way the rules are currently written, employers will have to check each time a pension contribution is paid into their scheme that this amount is more than the minimum required by law. The worry is these additional tests will prove too much of an administrative hurdle – and employers will instead close down their existing schemes or reduce contributions to the minimum. In that case, some workers, particularly low earners, could see their final retirement income suffer. I don't think any current pension saver should lose out because of these new rules, and I hope the government will reconsider this. By doing so it could save someone on average earnings, saving over the course of their working life into a typical group personal pension, 100 a week in lost pension income.

If an employer doesn't currently offer a pension scheme – and doesn't want to set one up – they can automatically enrol their workforce into the new government-designed national pension scheme. This has the working name of "the personal accounts scheme", and a new public body has been set up specifically to design and then implement the scheme. This is being funded by taxpayer money – 57 million for the last two financial years – but it is starting from scratch and civil servants are busy learning the practicalities of running a multi-employer pension scheme.

These new plans rely on apathy and people not being bothered to opt out.

But for some opting-out is the right decision. People need to be confident that paying into a pension will mean a higher retirement income. However, the way means-testing in retirement works means some people will see the value of their savings eaten away.

At the very least the government should give people clear information, possibly in "traffic light" style, about how this could affect them to help them decide whether to join the scheme.

Another worry is whether the scheme will be designed to be financially sustainable. If not, then the taxpayer will have to support it, or charges may have to rise.

Neither is appealing.

Four years seems a long time off, but it will no doubt be here before we know it. Like the Olympics, the success of the new pension rules depends on careful planning, precise budgeting, and people understanding what's in it for them.

• Rachel Vahey is head of pensions development at Aegon UK