The Pensions Commission was created by the government in 2002 to review the adequacy of private pension savings in the UK. After nearly three years work the Pensions Commission delivered its final report on 30th November.
Its recommendations are radical but fairly predictable given the decline in private pension savings and increased pensioner longevity; put simply something has to be done.
The brief of Lord Turner and his team was to look at private pension provision. Not surprisingly his report includes the role of the current state pension schemes; any cohesive strategy must recognise that both state and private savings are key drivers.
New Secretary of State for Work and Pensions John Hutton welcomed the report calling it an “important milestone towards a lasting pensions settlement.” It is absolutely crucial that this review is given thorough and urgent consideration by politicians and that personal prejudices are put to one side. Friends Provident recently conducted research into public perception of the government and its handling of pensions. The survey results suggest that 75% of those questioned either absolutely or probably do not trust the government on pensions.
The Pensions Commission’s report and the subsequent debate give the government the opportunity to demonstrate its willingness to make hard decisions for the long-term good of UK citizens rather than fudge something more palatable in an aim to get them past the next ballot box. The government plans to publish a white paper on pensions next spring.
Friends Provident welcomes this report and we support many of the recommendations. However, we believe that consultation is required with the pensions industry as to how best the proposed National Pensions Savings Scheme (NPSS) should be established and operated.
Lord Turner believes that given the UK population demographics, we must face up to an increase in GDP spent on state pensions with today’s 6.2% expenditure rising to c7.5% -8% by 2050. The report proposals:
1. To restore (starting in say 2010/11) the indexing of the Basic State Pension (BSP) in line with growth in earnings rather than prices. This change will gradually reduce the numbers of pensioners subject to means tested Pension Credit. We support a move that encourages people to save and we believe IFAs will broadly welcome a regime that makes it easier to give advice in the knowledge that those on lower incomes can save for a private pension, and not have their state benefits cut-back.
2. We welcome the proposal that entitlement to BSP be based on a residency test rather than contributions paid, thereby ensuring a fairer deal for non-working women and carers. The report suggests that “ideally” a universal BSP be introduced for all pensioners from age 75.
3. We believe that a rise in State Pension Age (SPA) is inevitable. The proposals are to link the rise to increases in life expectancy, suggesting an SPA of 66 by 2030, 67 by 2040 and 68 by 2050. The “savings” by raising SPA will help offset the higher indexation costs of BSP.
4. SP2 and contracting-out are recognised as far too complex and it is proposed that SP2 should gradually be moved to a capped flat rate pension and that contracting-out should cease to be an option, other than for defined benefit schemes. These proposals need to be considered with the plan to introduce a National Pensions Savings Scheme (NPSS)
We broadly welcome the proposed new scheme which aims to provide at least base level pensions for those with no private or public sector provision. The move to automatically enrol employees from age 21 is a positive contributor in getting more people to commit to saving for retirement, although employees will be able to opt out of NPSS.
NPSS will require minimum compulsory contributions of 8% of gross earnings, (4% personal, 3% by employers and 1% tax relief) above a minimum threshold and capped at an upper limit. A limited range of investment funds will be offered, including a default fund.
Lord Turner believes the scheme must be low cost with a target annual management charge (AMC) of 0.3%. The proposals are that contributions be collected via PAYE or a newly created central Pension Payment System.
Friends Provident believes that NPSS would be more effectively managed via current pension products, such as Stakeholder. It is ironic that in its first report published in October 2004 the Pensions Commission stated that the UK has the most developed system of voluntary private funded pensions in the developed world. One year on it now proposes to discard a proven and effective lost cost model and infrastructure in favour of a new central government system. This system will be funded by taxpayers and the government has a poor track record of delivering complex financial systems on time and on budget.
We believe that the Pensions Commission has underestimated operating costs and at best an AMC of 0.5% to 0.65% could be achieved on the assumption that advice costs are avoided, an issue on which we need to be convinced.
Friends Provident does not believe that the introduction of NPSS will severely impact our existing portfolio of pension schemes. NPSS is a likely to be a basic “no frills” savings option with limited choice. Many existing clients operate good quality schemes and will be able to opt out of NPSS. Indeed the inclusion of automatic enrolment should positively increase the value of our pension schemes.