Current affairs: Reforms may lead to fewer savers
Auto-enrolment and the introduction of a government-designed pension like personal accounts is a bit of a distraction. The government is introducing personal accounts and auto-enrolment to ensure that every employee in the UK will have access to a 'good' workplace pension scheme; with the workplace pension scheme called personal accounts as a default. In short, the personal accounts scheme will be the off-the-shelf scheme for employers who either can't be bothered to run their own scheme, or don't want to.
But at the moment we've already got a good workplace pension scheme for every employee in the UK; it's called the state second pension (S2P). Not only that, but we've had an earnings-related state second pension scheme for all employees since 1961; nearly half a century ago.
In its heyday, the state second pension scheme was called Serps - the state earnings-related pension scheme. Serps, when it started back in 1978, was a very generous scheme that aimed to provide a pension to members broadly equivalent to one-eightieth of uprated average salary. It stacked up pretty well against the private sector pension schemes that the larger employers provided for their employees and was, in effect, an occupational pension scheme for employees whose employers either couldn't be bothered to run their own scheme, or didn't want to.
The main thing about Serps, the current S2P and the ancient graduated scheme that spawned them, is and was that they were compulsory for both employees and employers. It has always been possible for employers to contract out of the state-run second pension if their own schemes were of sufficient quality, and it has been possible lately for individuals to contract out too, albeit on a different basis. But the bottom line has always been that in the absence of suitable alternatives, membership of the state-run occupational pension scheme has been compulsory.
It's not widely appreciated or understood, but the loss of value to private pension savings caused by the withdrawal of means-tested benefits also happens to the 'value' of S2P and Serps pensions too.
It always has and the problem has worsened as the extent of means-testing for the elderly has spread, just as it has for private pensions and as it will for personal accounts. If you are compelled to save in a scheme that delivers poor value there is nothing you can do about it.
But from 2010 onwards the state second pension will begin to morph into a flat-rate top-up to the sadly inadequate basic pension. The compulsory earnings-related workplace pension scheme for all employees will be replaced by voluntary membership of existing workplace schemes or the default scheme of personal accounts. But, and it's a big 'but', the crude way that means- tested entitlements strip value from other pension savings will be left unchanged.
To me at least, that says we're heading for trouble. It's not too hard to imagine why people given the choice in the full knowledge of the potential loss in value of their voluntary savings might in future choose not to save at all. Just as it isn't hard to guess that if people in the past had been given the choice of paying a lower rate of national insurance they would have done so if membership of the state second pension scheme had been voluntary rather than compulsory.
With the anticipated future increases in mortality the current set of pension 'reforms' may well become something that many of our citizens may literally live to regret.
First published in Pensions Week, 11 August 2008