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Government takes the first step with pension reform

Government takes the first step with pension reform

[dropcap letter="T"]he government’s white paper on pension reform is a big step on the road to a simpler, fairer and more comprehensible system. The ending of contracting out and the amalgamation of the second state pension into a basic state pension, which eliminates most of the need for pension credits, will give people a simpler and fairer basis on which to plan their pension. In particular, credits given to those who drop out of the work force, to raise children or to be carers for the elderly, is a great step and will allow many, mostly women, accumulate the 35 years contributions needed to give them a full state pension.

A lot of the attention has focused on the anomalies in the proposal instead of focusing on the reform’s effects on the majority of the population but it isn't possible for the system to be changed in a way that benefits everybody while at the same time having a sustainable cost base. The government deserves credit for coming up with a system that eliminates many of the traps inherent in the current system and making it easier for those who are saving small amounts to see the value of these savings.

This is particularly beneficial to those low-earners currently being auto-enrolled into pension schemes. The fact that they will benefit from the schemes because their savings will not be offset by reductions in pension credit will make it much easier to encourage them not to opt out of their new pension schemes. For employers it also removes a concern that lower-earners would have a case if they claimed that the employer sponsored pension schemes they had opted into had caused them a loss because their pension credits were reduced.

This pension reform bill is a big step forward and the pressure to make changes to deal with some of those who lose out should be resisted. Those who may lose out in the changeover should be compensated by parallel measures rather than by complicating the basic pension system. We've seen that complex systems will backfire because hardly anyone understands how they work and so they act as a disincentive to engaging with the system.

However, this reform does not solve all foreseeable problems in the pensions area. In particular, it is still expected that a significant portion of the population, possibly as high as 40%, will opt-out of the auto-enrolled pensions. To avoid a government being pressured into giving in and providing extra benefits, which would get us back into the same complicated pension landscape which we have been trying to escape, we need to move to a compulsory pension system where anybody who works contributes to a scheme.

Compulsion is the next logical step and it will ensure that everyone not only has the basic pension from the state but will have it topped up by an amount of pension saving that has accrued across their working life. This is a much surer way to bring pensioners above the absolute poverty line while keeping the taxpayers' contribution to a fixed amount that is calculable and therefore can be provisioned by the Treasury.

This pension reform proposal is a good first step; but there is more to do if we are to have a system which ensures that everyone can have a dignified retirement based on their own savings, supported by a strong basic pension rate.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

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