Why auto-enrolment is only half the job

This level of reform will not be seen again for generations, which is why the job begun in 2007 must be finished. We do not want its result to be a flawed system.

The single biggest issue that stood in the way of the idea that company pension schemes could be extended to all workers was the unfortunate fact that means-tested support for the elderly disincentivised pension saving.

It is the duty of government to ensure such schemes provide good value for money

The growing range of these benefits combined with the ever-dwindling value of the basic state pension meant at the turn of the century ever more pensioners were becoming entitled to means-tested handouts from the state to supplement pensions.

The effect on private and state second pensions (S2P) was, in many cases, devastating. For many who ended up on means-tested support, the real value of their private pension savings stood to be greatly reduced.

This potential catastrophic loss of value was acceptable, or at least accepted, when it applied to compulsory S2P entitlements, but could not sensibly be extended to the private sector where employees would have the right to opt out of company pension schemes.

Gordon Brown’s government tackled this issue head-on and the coalition government has, through the efforts of Steve Webb, delivered on that foundation by combining the two state pensions, improving the level of future state pension entitlements and largely eradicating the means-testing problem. 

For the first time in decades we can now be assured that it pays to save into a pension, and our politicians from all parties deserve great credit for that. But ensuring it would pay to save was only ever going to be half the job.

With millions of new pension savers soon to be auto-enrolled into company schemes over the coming years, it is the duty of government to ensure such schemes provide good value for money.

It would have been preferable if the reforms resulted in a small number of large, multi-employer schemes rather than a large number of small, single-employer schemes.

That would have allowed for sensible distribution and management costs and is something the original architects of these reforms should have considered more carefully. 

That omission, though, means the government now needs to consider restricting the charges that schemes, particularly small schemes, can apply.

Clearly, that is not likely to be a popular policy; it will have many opponents. But it is crucial that the job is completed so it not only pays to save, but such savings represent good value.

Generations of future pension savers will be relying on this job being finished.

Steve Bee is CEO and founder at Jargonfree Benefits