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The Plan B group is pointing to problems in pension reform
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John Lawson Pensions
Much speculation has surrounded what a working group led by IBM has been looking at. The “Plan B group” is rumoured to be considering a range of alternatives to personal accounts.
Much of the speculation was just that, predating any substantive talks. The work of the group is ongoing but I hope to explain what is and is not being looked at.
For starters, there are no plans to replace personal accounts. Private sector providers have said repeatedly it is not commercially viable for them to serve the smallest employers. Barring a miracle of pubs and cafes paying average pension contributions of £5,000 per employee, the numbers do not stack up.
A provider of last resort is needed to allow these employers to meet their legal duty and this is who personal accounts are aimed at.
Thus far, the scheme has hung its hat on a charge of 0.5 per cent. While low charges are desirable, they are not the be-all and end-all. If personal accounts can be delivered at this price without state subsidy, fine. If not, customers should be charged at cost, even if this is 1 per cent or more. Subsidy would amount to unfair competition.
But there is no smoke without fire. Many of the big providers have common concerns about the impending pension reforms. Their priority is to protect and nurture existing good quality schemes, but some of the new rules do not make this easy.
For example, contributions calculated using banded earnings are a big problem for existing pensions. Why this new definition when basic earnings have worked well for years? Using basic earnings to calculate contributions also favours lower earners. Surely, employee champions such as the Trades Union Congress must see that.
The fate of individual personal pensions is another concern. Will employers contribute to existing plans? Will employees be able to afford their current scheme and pay 5 per cent into a personal account?
Then there is automatic enrolment. Why can’t employers safely enrol workers into a good pension early rather than wait until 2012? Allowing employers to make existing schemes compliant early must surely be better than forcing them to wait another three years.
Those on the pension front line predict there will be levelling down, with the exception of schemes that already have high take-up and contributions. A tight economic climate does not help affordability either.
Finally, is 8 per cent enough to generate an adequate retirement fund? If savers think this sufficient, they are bound to be disappointed. Should plans be put in place now to keep increasing the contributions until they reach a meaningful level?
Plan B aims to raise these valid concerns before any lasting damage to pensions is caused. As the biggest pension providers in the land, we have a responsibility to do so.
John Lawson is head of pensions policy at Standard Life
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