The Pension Commission has produced a high quality and thought-provoking report which will serve as a valuable basis for the pension debate. Some recommendations will gain widespread support while others, on further inspection, will prove unwise. In considering the report my advice to Government would be to repeatedly check any proposed way forward against these key questions – how many more people will end up saving; are key under-pensioned segments helped; is the worksite being fully utilised; and will consumer engagement improve?
The two main planks to Turner’s second report are reform of the state pension system and the establishment of a National Pensions Savings Scheme (NPSS) into which employees without “good” occupational provision would be automatically enrolled.
Despite not being part of its original remit, the Commission has made it clear that making changes to private pensions without tackling the difficult state pension issues is unlikely to provide a cohesive solution. The report has therefore looked at the state pension system with the aim of making it simpler and more generous, especially for groups such as carers, and of reducing the dependency on means testing. A number of options are put forward to increase the state pension age over time in return for a higher basic state pension. The State Second Pension would also be simplified and gradually reduced in value to become flat rate.
Some of the proposed reforms are welcome and should make the job of the adviser easier as the current complex system and widening of the means testing net over time discourages lower earners from saving. And improving entitlements for groups such as carers is a welcome move. However other reforms could prove very damaging. Turner proposes abolishing contracting out into money purchase schemes including personal pensions from 2010. My own company strongly opposes this as contracting out can play an extremely important role in encouraging people to contribute to their own private pension and in moving unfunded state pension liabilities over to a funded basis.
Reform of state pensions, if it goes ahead, is likely to be phased in over several decades. But Turner’s other main proposal, the NPSS could, he suggests, be implemented in 2010. The NPSS would be a centralised state system attracting minimum contributions of 5% employee (including 1% tax relief) and 3% employer. Employers would either auto enrol employees into a “good” existing scheme or the NPSS, with employees having a month to opt out. The prime objective of NPSS design appears to be to reduce charges to below those typically available today, a figure of 0.3% is frequently mentioned. In setting such a charge cap Turner does not envisage any adviser involvement in NPSS. Instead its success in widening pension coverage will depend on an awareness raising campaign, rather like stakeholder one assumes!
I am not aware of any other country where, in the absence of hard compulsion, the cost of advice is not factored in. And without advice there is a strong risk of widespread opt-out, especially if the employer wants to save his own 3% contribution.
I support the use of auto-enrolment which has already proved a success in the private sector. However instead of a new build saving scheme and the potential risks of a new Pensions Payment System, why not use the existing infrastructure of GPP and Stakeholder with its slick interfaces between provider systems and employer payroll systems? This could boost pension saving immediately rather than a delay until 2010. And auto-enrolment could be used to make Stakeholder work as originally intended.
I have other major reservations about NPSS as proposed. Those of us who, in the run-up to A Day, have spent enormous effort moving to a single tax regime and breaking down the barriers between existing pension schemes see the suggestion of a separate tax regime for NPSS as a massive step backwards. And the Commission admits that its proposal of a single rate of tax relief (above the basic rate) for employee contributions but possibly removal of the tax free cash option from final benefits would not be attractive to higher rate tax payers.
If NPSS could operate with a high take-up it would have the greatest benefit in small and medium-sized enterprises (SMEs) where pension provision is currently patchy. But in big enterprises, where pensions tend to be higher than NPSS, the risk is “leveling down”.
It is hard to see what NPSS, as proposed, could achieve that the pensions industry can’t. We welcome Pensions Minister Stephen Timms’ invitation to work up details of an industry-led alternative model.
Disappointingly, the self employed gain very little from the report and it is difficult to see why those who have not made provision so far will be encouraged to do so in the future.
The Turner report is not the end, but rather the end of the beginning. It was clear from pre-publication leaks that the Government is unlikely to endorse the recommendations in full. The industry now has a few months in which to rise to Stephen Timms’ challenge and convince the Government of the benefits in building on existing infrastructure, factoring in the cost of advice, rather than gambling on green field solutions.