So far, so good, but best not to get too misty-eyed about it yet

The Pensions Bill is the last piece of the long-term pensions reform jigsaw, following the vision first sketched out by Lord Turner in his report. From 2012 it establishes a simple and cheap national system of personal accounts for up to ten million people.

Most of those people will be enrolling in a pension scheme for the first time and at least 3 ½ to 4 million of them will be women. For many low to middle income earners with no pension provision at the moment, it could be a massive step towards a secure retirement.

Of course, in any scheme of this size there are bound to be problems which will need to be ironed out. Here are a few which their Lordships might like to take up in more detail.

Are You In Or Out?

To get enough of the ‘right’ people enrolled in the new scheme, i.e. low earners who aren’t saving for a pension already, the government has decided that everyone will be automatically included unless they expressly choose to opt out. The problem is that, for some people, the new scheme may not be the right financial answer.

The government is understandably keen to avoid political blame, or even lawsuits, for mis-selling pensions. So, ministers have either said that no-one will be worse off in the new scheme, even if it is not financially optimal for them, or they have relied on the Thoresen Review to suggest ways of providing enough generic financial advice — now downgraded to ‘money guidance’ — to avoid blame.

Both these arguments have problems. People who have multiple part-time jobs, large credit card debts or who might lose means-tested benefits as their savings build up, might all find themselves worse off if they do not opt out.

Nor does the Thoresen Review recommend how to provide the kind of guidance that the government will need. Nobody wants a reappearance of naked pensioners in Whitehall protesting against poor government savings advice, so this is an important issue to get right.

Cheap And On Time?

Every few hundredths of a per cent increase in running costs will have a devastating effect on the size of each person’s eventual retirement savings pot. This ‘haircut’ is worst for the kind of low-income savers who are the targets of the new scheme. Rock-bottom costs are clearly vital.

The huge scale of the scheme will help cut costs, of course, because managers will be able to negotiate excellent deals. But enormous size creates difficulties of its own because nothing on this scale has ever been attempted in Britain before.

Every extra clever tweak or complication which parliament introduces will raise costs. Lots of different ‘ethical investment’ funds, high quality financial advice or enrolment promotion campaigns, scheme transfers, additional contributions and lump sum investments — all of which are excellent and admirable ideas — will pose real difficulties for this scheme. It’s like a budget airline: the challenge is to design out as much cost and complexity as possible.

Timing looks like a challenge too. The government has given itself until 2012 to introduce the scheme, but the new chief executive of the Personal Accounts Delivery Authority, Tim Jones, has expressed doubts about whether this timescale can be achieved.

Levelling Down?

Britain already has plenty of people who are enrolled in pensions, so personal accounts must recruit the ones who are not. The fear is that, rather than creating a whole new class of low to middle income savers who previously were not saving for their pensions, personal accounts will give birth to a state-owned monster which will destroy and degrade existing schemes instead.

The government is proposing a series of ideas to deal with this risk: there is a maximum contributions cap of £3,600 per year and most firms with existing schemes will be able to exempt themselves from setting up personal accounts.

Keeping the costs of personal accounts low will also help, because existing schemes will have far more flexible and sophisticated bells and whistles than the ultra-simple and low-cost government scheme.

Many employers have been cutting the costs of their existing pensions schemes for years so deciding whether personal accounts are causing levelling down will be a problem. Probably the most important issue here is to make sure the Bill’s protections for existing schemes are as solid as possible. That means ensuring there is no wriggle-room on the contributions cap, for example, or any compromise on the simplicity and clarity of the exemption for existing schemes.

Practicality, Not Principles

The good news is that, so far, there has been a strong and broad-based cross-party consensus supporting the Pensions Bill. However, there are real issues and difficulties in the detailed practicalities of the way the new scheme will operate, even though the principles are broadly agreed.

Given the size of the financial investment fund that will be created and the complexity of the IT projects and systems which will be needed to set it up and run it, the operational risks and the consequences of failure are huge. Best not to get too misty-eyed about it until those issues have been agreed.

John Penrose is MP for Weston-Super-Mare.