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Flaw show

After three months, the consultation period on the Government’s White Paper on pension reform has now ended and there are many elements of the plans that provoke disagreement.

The two central reforms that have been proposed concern reform the basic state pension and the introduction of a state-run system of personal retirement accounts modelled closely on the Turner Commission’s proposed National Pension Saving Scheme but both of these ideas have provoked strong criticism as well as support.

Hargreaves Lansdown head of pensions Tom McPhail says the proposals are a curate’s egg. Changes to the accrual rate for the basic state pension and increasing the state retirement age are both improvements on the current system but he says that not all the proposals are to be welcomed.

Despite pension ministers John Hutton and James Parnell’s best assurances, McPhail says the problem of means-testing will not be eliminated by the reforms and he has doubts over the design of the NPSS.

He says: “The key point that we made is that it has to survive the McDonald’s test. The NPSS should be as easy to understand as the McDonald’s menu.”

He believes that the choice of funds should be limited to no more than four or five and, to enable the funds to run at minimum cost, the scheme should not be run by the industry.

Instead, the industry should only get involved at the end of the process when a decent amount has been accumulated.

There is a risk of some “levelling down” and for this reason McPhail suggests that transfers into the NPSS should be prohibited.

Scottish Widows head of pensions market development Ian Naismith agrees that measures have to be put in place to safeguard existing, good quality pension provision. Widows has suggested that in addition to the prevention of transfers into any national scheme and a restriction on the number of savings options, there should also a maximum annual contribution of 3,000.

Despite this, Naismith says that, on the whole, the reforms work well as a package. He says: “They are going in the right direction and they have been right to tackle the state pension and private provision at the same time.”

He says although he initially wanted to see the more radical reform of the state pension to address means testing, “given the financial constraints that they were clearly working to, what they have come up with is a reasonable compromise”.

Naismith adds that if the Government’s assurances on means-testing prove true, then although older workers are going to have a tough choice to make, younger workers should be ok.

He says: “People who in their 50s when the system of personal accounts starts are going to have a very difficult decision to make. But people in their 30 and 40s, if they keep saving into the scheme, should be safe from means-testing by the time they retire.”

Standard Life head of pension policy John Lawson says there is “one big flaw” in the Government’s plans.

He says: “The impact of means-testing on the NPSS means there are an awful lot of people who will not benefit from saving in it”.

Lawson has written a detailed response on the plans, including an analysis of how means-testing is going to affect savers and he concludes that up to 60 per cent of the target market for the NPSS (people earning between 5,000 and 25,000) will be affected by means-testing. He says this is not just negating the effect of employers’ contributions as some of these savers will effectively lose out on the value of their own contributions, making them no better off than if they had not saved at all.

Lawson says: “A pension is only worth it if you get tax relief. If you are not getting the tax relief, you are better off saving in an Isa. If you put your money into a pension, then you lock it away until you are at least 55.

“We are suggesting that there is an age cut-off of 40 for joining the NPSS when it is introduced but to be absolutely certain you would have to go for 35.”

Informed Choice managing director Nick Bamford agrees that the NPSS runs a risk of undermining existing pension arrangements. He says: “If the statutory NPSS requirement is 3 per cent and as a business you are chucking in 7 per cent, it does not take a financial genius to realise that there is a huge saving to be made.”

Bamford is sceptical that the level of fund charges can be met but says the biggest problems with the pro- posals are over the state pension system.

He says many of the problems could be eliminated by introducing “a decent state pension for everyone and paying for it by scrapping the increasingly complicated second layer of state pension.

Bamford says: “Why have a system that many members of the public fail to understand? Fred and Mary should know exactly what they get when they reach state pension age. Fred and Mary should know that at the age of 30, every extra penny they save will go towards their retirement.

“The current batch of proposals are not reform, they are not modernisation, they are simply tinkering around the edges.”

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