Government could face pensions mis-selling scandal

Posted on February 17th, 2011 | Categories - Pensions

A universal flat rate pension payment system should be introduced to avoid means testing.

Means tested benefits could be affected by new pension reforms.

The government will face a major ‘mis-selling scandal’ if it does not simplify the new auto-enrolment pension system planned for next year, according to a pensions group.

Under the proposed system employees will be automatically enrolled into their company pension schemes from 2012. Employers who do not have a pension scheme will have to enrol their staff into the National Employment Savings Trust or Nest.

However, the National Association of Pension Funds (NAPF) highlighted that under the planned system workers who are enrolled automatically into their company pension could miss out on means tested benefits in the future.

NAPF chairman Lindsay Tomlinson has recommended that the government solve the problem by simplifying the system so that everyone is paid £140 a week – this would put an end to means testing completely.

He said: “Unless it tackles the means-testing trap, the Government faces a major mis-selling scandal. This will materialise a few years down the track, when a large number of people discover that being auto-enrolled into Nest has merely resulted in a reduction in means-tested benefits they would have received if they had opted out. This is potentially a big problem that we are storing up”.

He continued: “The desperately needed simplification of pensions has to start with the state pension. It is the bedrock on which all else is built. We recommended the creation of a Foundation Pension, payable to all UK citizens, of around £140 a week. Paying a basic state pension at this level would enable a reduction in the baffling array of means-tested benefits”.

Mr Tomlinson explained that getting rid of means testing would give people the incentive to save and also feel secure that their savings would not affect the level of state benefits that they would otherwise receive.