News analysis: Will lower-paid workers be worse of in 2012?

Some lower-paid workers could be worse off when the new pension reforms come into effect in 2012

Low-paid staff may not all benefit from changes set to come into effect under 2012 pensions reform legislation due to the impact of auto-enrolment on means-tested benefits. But, despite this, pensions experts have largely accepted the findings of a government report on the reforms, which found most of the working population would be better off if they are automatically enrolled into a pension.

The Department for Work and Pension’s (DWP) report Savings for retirement: implication of pensions reforms on financial incentives to save for retirement, said that even after taking inflation into account, 95% of employees would get back more than they saved into workplace pensions, while 70% could expect to get back more than twice the amount they put in. But the report also said 5% of people, largely low earners, would not get back the full value of their contributions. This has led to concerns that this group’s pension savings under auto-enrolment will simply replace the means-tested benefits they would have received anyway.

Helen Dowsey, a principal at Aon Consulting, said personal accounts would help lower-paid workers achieve greater financial independence, but added: “We urge the government to consider exempting pension savings from means testing because this will prevent many low earners from using this as an excuse not to divert scarce resources towards pension savings.”

To combat this, the government could increase the value of pension savings for low earners by, for example, lowering the age at which staff must be enrolled, or raising contribution amounts, said Tom McPhail, head of pensions research at Hargreaves Lansdown. It could also abolish means testing or ignore it with regard to pensions and increase the basic state pension paid to everyone, he said.

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The validity of some of the assumptions used in the report have also been questioned. Paul Macro, a senior consultant at Watson Wyatt, said: “The government has done lots of sophisticated modelling to support its conclusions, but a model is only as good as the assumptions underpinning it. The government assumes people will get a real return of 3.5% a year from investing mostly in equities – and this is then reduced by the impact of the benefits system. After the events of the last year, no one should need reminding equity markets are volatile and some savers will get much lower returns.”

But McPhail said concerns about equity returns and means-tested benefits should not detract from the advantages of personal accounts and auto-enrolment. “The bottom line is, if everybody concentrates on saving as much as they can, that is likely to produce a better outcome than nit-picking over equity market growth assumptions and the privatisation of the welfare state.”