State pension reforms are letting down the auto-enrolment target market

The state pension reforms go a long way towards simplifying a ridiculously complicated system. Few would begrudge the idea of paying a more generous pension to the self-employed or those who have looked after children and others and missed out on building an income anywhere near the level of the means test. And there will be few tears shed for the reduced S2P of higher earners to pay for that.

John Greenwood

But the White Paper published last month does leave low and medium earners who have stayed contracted in disproportionately worse off than virtually all other groups, particularly those who have contracted out.

This is important because those who have contracted out already have pensions – they are not part of the problem. The 70 per cent of workers who until auto-enrolment have not been offered any pension contribution from their employer at all are far more likely to have been contracted in to state second pension from day one. Yet, as our figures on page 9 show, low and medium earners with full work histories will be worse off under the new system. Not only will they be worse off, but the pots they will build up if they are automatically enrolled this year at 8 per cent of band earnings will not, for many of them, offset the loss in state second pension they will have suffered. For those enrolled at 1 plus 1 per cent until 2017 at the earliest, the cut in income will be even worse.

I cannot think of a worse message just as auto-enrolment is getting under way than the idea that the new pension your employer is enrolling you into won’t even make up for your lost state pension.

So how did such a perverse state of affairs come to pass?

It appears the government is prizing simplicity over fairness. Only by allowing those who have contracted out to accelerate their state pension on very generous terms can the government get to a position where more people actually get the flat rate pension than those who do not. That means others have to be worse off to pay for it. And this simplicity is a worthwhile goal because it makes auto-enrolment a clearer proposition.

That sounds great in theory – but if you are a low or middle earner with a full work record, you are less likely to be bothered about simplicity than the fact that you are worse off, even with your shiny new auto-enrolment pension.