The Government runs the risk of facing a pensions mis-selling scandal if it fails to overhaul the state pension alongside its auto-enrolment reforms, a pensions group has warned.
The National Association of Pension Funds said there was a clear risk under the proposed system that workers who were automatically enrolled into their company pension scheme could miss out on means-tested benefits as a result of saving towards their retirement.
It is calling on the Government to avoid the problem by simplifying the basic state pension, so that it pays everyone around £140 a week, to remove the need for means-testing.
From 2012, all workers will begin to be automatically enrolled into their company pension scheme, although they will retain the right to opt out. Individuals will contribute 4 per cent of their pay, with their company paying in 3 per cent and the Government topping this up with 1 per cent.
If employers do not have their own pension scheme, people will be enrolled into the National Employment Savings Trust or Nest.
But NAPF chairman Lindsay Tomlinson 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 added: “The desperately needed simplification of pensions has to start with the state pension.
“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.”