National Association of Pension Funds chief executive Joanne Segars believes the Government state pension reforms are affordable and are likely to follow a blueprint she helped draw up with pensions minister Steve Webb when he was in opposition.
In an interview with Money Marketing, the former Association of British Insurers head of pensions says the coalition’s reform programme is “beginning to stack up” after a spate of announcements set to culminate with the unveiling of detailed plans for a universal state benefit before the end of the year.
The NAPF has long lobbied for what it calls the foundation pension and maintains close ties with Steve Webb. Segars and Webb both contributed to a pamphlet in April this year, edited by Baroness Hollis, outlining how such a policy could be implemented without overburdening the taxpayer. “We have been talking with Steve about this for donkey’s years,” she says.
Following confirmation from the Department for Work and Pensions that it will look to end means-testing, Segars says a simplified state benefit represents a crucial “missing piece of the jigsaw” of pension reform.
She says: “I think the stories that we saw in the papers are really exciting. They are exactly the sort of thing we have been asking for, although I am not sure they have got the entire package. My sense is that it is more likely to be something that is contributory and citizenship-based and that is certainly what we have been suggesting in our Vision for Pensions.
“But if we get a basic state pension which is easily understandable, at around £140 a week, that is going to be such a huge step forward and it will lift a huge amount of people off means-testing.”
Given the recession and the Government’s determination to hack away at the deficit, paying for such a reform could be a major obstacle but Segars insists the Treasury would only have to fork out an extra £1bn a year, pre-triple lock, to introduce a flat-rate benefit at £140 a week. She says: “If we are talking £1bn a year then, notwithstanding the economic environment, that is kind of manageable.”
However, given the proximity of the announcements, a cynic could look at the pension plan as an attempt to sugar the pill ahead of a rapid acceleration in rises to the state pension age. Under Labour, the SPA would have risen to 68 by 2046.
“I think that will be the political trade-off,” Segars admits. “I suspect the move to 68 will be faster, it would be slightly odd if it wasn’t. Longevity is continuing to push out faster than Turner predicted. We suggested that to pay for a universal pension of £8,000 you might need to push the state pension age up to 70. I very much doubt that 68 will be the end of it.”
The second key pillar of pension reform and one which automatic enrolment aims to correct, is workplace provision, which the coalition Government has pledged to “reinvigorate”. Segars believes a key challenge facing policymakers, the regulator and Nest is engaging with small employers, which have already displayed resistance to the changes through the Federation of Small Businesses.
“I think small employers have not changed their mind about pension provision over decades, which is why we are going down the auto-enrolment soft compulsion route,” says Segars. “It is about soft-compelling not just individuals but employers too. In terms of winning the hearts and minds of employers, it is about making it simple.
“The smallest employers will not be in until 2017, when hopefully this recession will be a dim and distant memory, and, because it is phased in, there is likely to be a clear pension contribution/wages trade-off over a three-year period.”
Segars admits the National Employment Savings Trust is “a leap into the unknown”, with the decision to front-load the charging still causing concern.
She says: “The charging structure might put people off but we don’t know. We are about to launch the biggest defined-contribution scheme this country has ever seen, the biggest in the world potentially. It is a brave step we are about to take, so we need to get on with it.”
With the launch of Nest and the continued shift from defined benefit to defined-contribution provision in the private sector, scrutiny of the standard of DC schemes will intensify. The NAPF’s pension quality mark, which recently celebrated its first birthday, is trying to address the issue of pension adequacy. Segars says the PQM and PQM plus, which are awarded based on contribution levels, communications and governance, have started to drive improvements in standards of private sector schemes.
Segars says: “We set up the quality mark so we could push up standards of DC pension provision and we are starting to see employers who are setting up their DC scheme so it can get the quality mark.”
She believes the Hutton review, which will receive its final call for evidence on December 17, presents an opportunity to improve private sector pensions. “I think there is an opportunity to use what is going on in Hutton to inform the direction of private sector provision,” she says. “The sense seems to be that we will end up with some form of career-average structure, possibly up to a certain level of salary with some DC on top of that for higher-earners.”
Apart from engaging employers in pensions, the Government has also indicated its intention to investigate reforms on early access. Webb has previously suggested that allowing people to access 25 per cent of their pension pot early could bring an upsurge in saving.
“There are risks either way, so you can’t spin it twice,” says Segars. “Given that the average annuity pot is only about £25,000 to £30,000, the big question is are we just perpetuating pensioner poverty? It is a difficult issue and the evidence that this will encourage a whole lot of people to save is pretty muted. There is no solid evidence for the UK that it will start people saving in droves.”