RETIREMENT Pensions proposal 'could leave millions worse off'

MILLIONS of people saving through workplace pension schemes could be worse off in retirement because of flaws in the Government's proposed system of personal savings accounts, the pensions industry warned.

The National Association of Pension Funds said yesterday that the Government must restrict the new low-cost retirement savings plans to workers without access to good company schemes or risk employers "levelling down'' to less generous schemes for existing members.

"The risk of levelling down can be avoided if the Government adopts a narrower definition of the target group and aims personal accounts only at those people who do not have access to a good pension at work,'' the NAPF said.

The recommendation was one of 36 made by the NAPF in its response to the pensions White Paper published last December. Quasi-compulsory personal retirement accounts are due for 2012.

The pensions industry's umbrella body also called on the Government to rethink a pounds 5,000 annual limit for contributions to the accounts. It believes a pounds 3,000 ceiling would allow anyone earning up to pounds 33,000 a year to do all their pension saving through a personal account, assuming the 9pc contribution typical for defined contribution pension schemes.

According to the NAPF, most workplace pension schemes involve much higher employer contributions than the 3pc a year envisaged under the personal accounts system. Defined benefit, or final salary, schemes usually attract contributions of around 16pc of pay, while defined contribution, or money purchase, pensions are funded with 6pc employer contributions, usually topped up by 3pc by the employee.

Employers are expected to look for ways to reduce the cost of pension provision because a proposed system of "auto-enrolment'' will increase the low participation rates, making pensions a more expensive perk.

The NAPF calculated that an average employee earning pounds 23,000 would see a 30pc reduction in final salary if their employer moved from a typical defined contribution pension to a cheaper personal account - despite the employee making much higher contributions.

March 16, 2007