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Launch of National Pensions Plan Fails to Silence Critics

By Phillip Inman, The Guardian

UK

December 13, 2006

· Many 'could be left worse off and unable to appeal'

· TUC hails compulsory employer contributions

The government unveiled plans yesterday for a national pensions system to increase retirement saving among Britain's low-paid workers - but failed to allay concerns that many people could be left worse off.

A decision to sidestep regulatory control by the Financial Services Authority (FSA) also raised fears that millions of people could be mis-sold pensions without any means of appealing against the government or financial companies.

John Hutton, the work and pensions secretary, told MPs that automatically enrolling up to 10 million workers in the scheme would play a significant role in raising retirement saving. A centralised scheme would enjoy economies of scale. It would offer those with only small savings a low-cost option to the high fees charged by the financial services industry.

"Overall participation in occupational schemes has been falling since the late 1960s," he said. "And disproportionately high charges are making the personal pensions market uneconomical for those on moderate to low incomes, who often stop contributing to private schemes after a short period of time. We will, therefore, be bringing forward legislation to create new low-cost personal accounts as the catalyst for a new savings culture."

Legislation expected next year will give "every employee in Britain earning over £5,000 the statutory right to receive a contribution from their employer towards an occupational pension". Employers will contribute a minimum 3%, in addition to 5% from employees in a band between approximately £5,000 and £33,500.

Mr Hutton expected between £4bn and £5bn to be put into the scheme by employees, though it could be up to £8bn.

Unions and consumer groups welcomed the proposals. The TUC hailed "another important building block in a new pensions settlement. Compulsory employer contributions are a major gain for people at work".

However, opposition parties and pension experts feared the scheme could lead to a huge mis-selling scandal.

Steve Bee, head of pension strategy at insurer Scottish Life, said there were several categories of savers who would gain little from saving because they would be stripped of means-tested benefits.

Mr Bee said regulations would need to be put in place to safeguard families from locking money they could ill-afford into a pension. "But the government has said in the white paper that it will be an occupational scheme. If it was a personal pensions scheme, which we were originally led to believe it would be, the FSA would regulate the selling process and insist literature explained the suitability. Under this scheme, it is not clear how they will get redress for mis-selling."

David Laws, the Liberal Democrats' pensions spokesman, said the government had failed to allay concerns that the scheme could prove a poor savings vehicle for millions of people.

He said: "You could be talking about 10% or even 20% of people losing money and another 30% failing to make the kind of gains the government originally said they should, which should be a massive concern for ministers, given that it is auto-enrolling people in the scheme."

Employers groups welcomed measures that allowed them to phase in the scheme and promises that its operating rules would remain simple. But they warned unions that wages would need to be kept low to pay for the scheme when it took effect in 2012. They said the extra costs must not be allowed to dent profits.