Removing barriers, extending benefits

Monday, January 07, 2008

Minister for Pensions Reform Mike O'Brien outlines his commitment to making personal accounts work.

Everyone agrees that people need to take personal responsibility to plan and save for their retirement. A recent research report for the Department of Work and Pensions called 'Attitudes to Pensions'¹ found that 52% of the people surveyed felt that it was mainly up to the individual to ensure that they had enough to live on in retirement.

Most people aspire to the type of income in retirement that can only be achieved by making private provision. Despite this, we know that seven million people are still not saving enough for retirement. Clearly, there is a mismatch between people's intentions to save for retirement and the money they actually put aside.

That is why, from 2012, millions of people will be automatically enrolled into a system of Personal Accounts or a qualifying workplace pension scheme. This would be one of the biggest leaps forward for pensions provision since National Insurance was introduced in the 1940s, and new legislation will be required to achieve this.

We know from our research that people were overwhelmingly in favour of the concept of a national pensions saving scheme (indeed, 84% in a recent poll) and supported the idea of automatic enrolment into a pension scheme (57%), particularly if there was also an employer contribution (68%).

The Government's reforms mean for the first time every employee will have a guaranteed right to a contribution from their employer to boost the value of their pension pot. The employee will put in a minimum of 4% of their salary, the employer a minimum of 3% and 1% will come from the Government in tax relief. This means that individuals' own pension contributions will at least be doubled.

These private pension reforms work as a package with the Government's state pension reforms in the Pensions Act 2007. A simpler, more generous and more widely available state pension will provide a solid platform for people to build up additional private savings.

Many people find pensions confusing and often make no choice at all rather than risk making the wrong choice. Simplicity is therefore essential. Nearly three-quarters of respondents in the same survey agreed that pensions can sometimes seem too complicated to understand the best thing to do. In fact, just 5% of respondents felt they had what they considered to be a good knowledge; a quarter said they knew little or nothing about pensions.

We can help individuals with the decision to save but it will remain a matter of individual choice. Part of the challenge is to provide people with the right kind of information so that they can make informed decisions about retirement planning. We are linking with the work of the Government's wider Financial Capability Strategy, aimed at making the public more switched on to financial issues as we take this forward. With automatic enrolment into Personal Accounts or a qualifying workplace scheme, we plan to take the pain out of saving for reluctant investors, and to overcome the inertia that acts as another barrier to saving.

People saving in Personal Accounts who do not want to make investment decisions will not have to. And for those people who want to play an active role in where their money is invested, there will be a range of funds available for them to choose from, including green and ethical funds.

We want Personal Accounts to focus on our target group of low to moderate earners, and complement – rather than undermine – existing pension provision. We have consulted widely and have been prepared to listen to the concerns of the pensions industry in this area, as our recent decision to opt for a £3,600 annual cap on contributions demonstrated.

We want to support employers offering good quality pension schemes. For this reason we are examining pension regulation with the aim of making the private pensions regulatory framework simpler, easing the burden upon employers. We want to lighten regulation, and in doing so strike a balance between protecting members' benefits and encouraging employer provision of pensions.

Setting up Personal Accounts will of course be a significant job. We are currently constructing an independent body now with the necessary skills and experience to get the policy design right, and to ensure that the interests of members remain at the heart of the scheme. The Personal Accounts Delivery Authority will offer independent advice to Government and will be responsible for getting the scheme up and running, and for ensuring employers meet their new obligations.

By removing barriers to saving, we hope to extend the benefits of a workplace pension scheme to millions of people who have not had access to one before, allowing people to take control of their retirement and plan for the lifestyle they want.

1 'Attitudes to Pensions' is a Department for Work and Pensions survey carried out by the National Centre for Social Research (NatCen). To read the report, visit www.dwp.gov.uk/asd/asd5/rports2007-2008/rrep434.pdf.