Do you agree with the Sandler recommendations to level the pensions playing field by changing the tax regime for non-life companies?
Ritchie: Conceptually, I support a level playing field in this and other areas. However, the IPA has always added more, and, in my view, unnecessary, complexity to the pension field. Both Pickering and Sandler are stressing that simplification is key going forward. Further developing and complicating the IPA rules are in conflict with this higher aim.
Stammers: I agree with the objective to level the playing field between life and nonlife companies and between different types of non-life company. But level ground will not be achieved without looking at all the tax differences. For example, life company pension funds pay stamp duty while mutual funds pay stamp duty reserve tax – unless they are through an IPA, when they are are exempt.
Gray: We agree with the recommendation. Major financial services providers such as Abbey National have a range of vehicles available to manufacture products for customers and will use the most efficient given a level playing field. Artificial barriers to entry are unhealthy in the vibrant and competitive financial services marketplace which we hope will emerge in the UK. This will benefit customers and providers with the ability to respond to the challenges.
Norwich Union recently announced plans to launch into the impaired life annuity market, believing the market is set for huge growth. How do you view the impaired life annuity market?
Ritchie: The impaired life annuity market is very interesting, particularly in the effect it has on the rest of the annuity market. I remember when non-smokers rates were first introduced for life insurance. The faster they spread, the quicker it became clear that underwriters who did not differentiate on smoking grounds had to assume that proposers smoked. The quicker impaired life annuities spread, the more it must be assumed that other pension annuity proposers share the longevity characteristics of the (voluntary) purchased life annuity market – they will live a very long time.
Stammers: Positively. Growth will come about through increased consumer awareness of the availability of impaired life annuities as more providers begin to offer them. This will in turn increase choice and therefore competition. The work in hand by the FSA to develop a basic annuity decision tree is likely to include a strong signpost for consumers to check out impaired life rates if they either smoke or are in poor health. The reduction in annuity rates we have seen over the last couple of years has generated the need to shop around for the best rate now more than ever before. Perhaps a rejuvenated impaired life market is the silver lining.
Gray: It is currently seen very much as a specialist area but, with the increased focus on annuities generally plus the entry of major providers, I agree that we will now start to see significant growth in the market for impaired annuities.
The ABI has joined the call to introduce annuities with money-back guarantees. Will this solve the annuity problem?
Ritchie: Money-back guarantees would be a very helpful development for the annuity market because they would be an option to address the concerns of people who worry about dying soon after annuity purchase. But everything has a price and the price of this option is lower income throughout life.
Stammers: No although all-owing capital protection will increase choice for consumers and overcome a common criticism of the annuity system – that it is “unfair” to those who die shortly after purchase. Capital protection has another benefit – the vast majority of annuities are taken out on a single-life basis despite the existence of a spouse or other dependents. At least this way some money could come back into the estate for their benefit.
Sadly, however, the annuity problem is far more deeprooted. With the average fund from a DC pension standing at under £25,000, the primary focus must be to encourage people to save more. Solve this and the flexibilities that already exist in the shape of investment annuities and drawdown become more accessible.
Gray: Anything that introduces more choice for customers must be welcomed. This type of annuity will not solve the “annuity problem” by itself but I think it will be one of a number of initiatives that will improve the public's perception of annuities. Others include further innovative annuity solutions, increased use of the open market option and cheap, accessible advice on the options available at retirement.
What effect would the TUC's plans for making employers contribute twice as much as employees to their company pension scheme have on pension provision?
Ritchie: This only works if private pension provision is made compulsory up to a defined level. To see this, compare an employer who pays 2 per cent and requires the employee to pay 1 per cent. That meets the TUC rule. Yet an employer who paid 6 per cent but required employees to pay 4 per cent would not. Which is the better scheme? So the argument is really the old one about compulsion.
Stammers: We already know from research that an employer contribution, even a small one, has a dramatic effect on employee take-up rate, so that aspect is positive. However, any deal of this sort requires the willing participation of employers if it is to be sustainable. The financial burden this would impose could push many smaller firms under. Restoring an employer's right to insist on scheme membership as a condition of employment is a better balance in my view, leading to a willing employer actively promoting the benefits of the scheme.
Gray: Stakeholder experience indicates that employees are far more likely to contribute if the employer is also contributing and therefore, on the face of it, such an initiative may increase pension provision.
The ABI has also called on the Government to introduce a pension tax credit for employers to boost contribution levels without the need for making them compulsory. What effect will such plans have?
Ritchie: I strongly support the ABI proposals. We all know that it is the employer contribution which makes pensions work – this proposal would financially discriminate strongly in favour of employers who made good contributions.
Stammers: This idea, when combined with restoration of compulsory membership, would be a very powerful tool in encouraging employer engagement without all the downsides of compulsion. We can see similar principles at work in the US 401(k) market – employer incentivisation was the key to that market taking off in the way it has. Add to the mix an employer's ability to be able to actively promote his scheme without fear that would be construed as regulated advice and you have created a virtuous circle – good for employer, employee, Government and industry alike.
Gray: Depending on the generosity of the credit, this may be enough to encourage some employers to start contributing but without compulsion it could simply reduce the pension costs for employers who are already contributing.
What other options are there to incentivise both employers and employees to contribute to pensions?
Ritchie: The Government needs to turn round the impression that it sees funded pensions as a cash cow to be milked. The obvious immediate issue is the value of contracting out rebates. That could be addressed quickly and simply by an urgent review of the basis. Tax treatment is more complex because of the interaction with company taxation, but where there's a will there's a way.
Stammers: Make them simple – simple for people to understand and simple for them to do. This means recognising that an employer wanting to set up a scheme for staff is a good thing that should be encouraged and not loaded down with red tape. It means recognising that complexity destroys understanding, which is a pre-requisite to wanting to buy. It also means making sure that when people do want to buy they can do so in a way which suits them and with the minimum of fuss, so equal attention needs to be given to both the demand and supply sides of the equation.
Gray: I do not agree with the introduction of full compulsion but I think the following will help: compulsory scheme membership, the consolidated pension statement, more employee education, improved benefit structures and reduced regulation resulting from the Pickering review.
Should the state second pension and the pension credit be scrapped, as the IPPR and others in the industry have suggested?
Ritchie: The IPPR proposals are very elegant but their Achilles heel is the abolition of contracting out rebates. I believe contracting out in the past has been a backbone of private pension provision and should be strengthened to make it so once again. Too many people who should know better are fatalistic about contracting out and indeed unconcerned about a reduced role for funded private pensions compared with unfunded state provision. This is madness.
Stammers: Both are barriers to simplicity, making pensions more difficult to understand and more difficult to advise on. Both suffer from a crisis of identity. With S2P, the Government needs to come off the fence – either it is a good thing to be encouraged or a bad thing to be done away with or better still refocused on just the lowest paid and non-earners where it can do most good.
Pension credit would be unnecessary if pensions savings were made exempt from means-testing. This sounds expensive but could well pay for itself in the long run as more people saved more realistic amounts towards their retirement.
Gray: Politically, it would be very difficult for the Government to scrap such recently introduced legislation. However, I think the Government has to look at how the minimum income guarantee, pension credit and both state pensions work together as a package. We need to make sure that all pensioners have sufficient income in retirement but at the same time we need to remove any disincentives to save. Moving forward, I think we should have one flat-rate state pension set at an appropriate level and people should be able to make additional private provision on top of this from which they get the full benefit.
Leslie Gray, pensions and investment development director, Scottish Mutual
Stewart Ritchie, director pensions development, Scottish Equitable
Nigel Stammers, pensions strategy manager, Clerical Medical