Nigel Stammers, pensions strategy manager, Clerical Medical
Martin Clarke, general manager(marketing), CIS
Martin Birks, asset accumulation leader, RSA
I s the FSA right to raise concerns over the sales of GPPs which have continued to flourish since the launch of stakeholder?
Nigel Stammers: It is not surprising that the FSA wants to understand why this is happening but it would be premature to raise concerns.
Most good quality GPPs now offer stakeholder price structures, with the prestakeholder GPPs invariably offering a 3 per cent plus employer's contribution. Neither instance should be a cause for concern.
However, not all providers have reduced the price of their GPP following stakeholder and it is likely to be these that the FSA will be focusing on and seeking justification for continuing recommendation.
Martin Clarke: The FSA has the right to investigate or raise concerns over the sales of any product – after all, that is their policing role. The significant increase in the volume of GPP contributions has been well documented and it would appear that much of this increase may be down to employers meeting the stakeholder exemption criteria – most notably the 3 per cent contribution requirement. This may not be such a bad thing if GPP schemes (in terms of consumer charges and benefits) have been adjusted to reflect the arrival of stakeholder.
If, however, it is simply an exercise of convenience at the expense of members then (a) it will reflect poorly on the industry and employers alike and (b) it will do nothing to solve the long-term funding problems which continues to face millions of ordinary people within the UK.
Martin Birks: Naturally any promotion or selling of GPPs needs to take into account its stakeholder cousin. Robust reasons-why letters and full explanations of what the customer can expect from each product may lead many employers to select GPPs as an alternative to paying any fees for the advice they feel they need.
The GPPs we have been selling are all priced below 1 per cent and in many cases 0.8 per cent/0.9 per cent – that is before up to 0.3 per cent fund tiering discounts. Charging 1-1.5 per cent per annum on higher indemnity paying GPPs obviously has its own risks, not least to the providers.
The Government wants annuity reform to focus on increasing competition in the market. How can this be achieved?
Nigel Stammers: Further measures to encourage consumers to take advantage of the open market option could be considered, building on the ABI and FSA work to date. Integral to this will be encouragement for more consumers to seek advice at retirement.
Simple decision trees to help those retiring arrive at the most suitable type of annuity – level or increasing, single or joint life, etc – might also be on the cards. Permitting the transfer of annuities between providers is also a possibility, although this has to overcome the selection risk against the existing provider before it could work.
Martin Clarke: Telling customers about their open market rights at retirement or providers' league tables will encourage shopping around but it will not on its own reform the annuity market. Greater competition in the market will only be achieved by designing and implementing annuity options which allow consumers to have greater control and flexibility of their pension funds while satisfying the industry, government actuaries and regulators.
There are already products on the market which offer fund choice, phased retirement or income drawdown options, but with the average annuity purchases of just £2,500 a year – according to the ABI – they will not solve the problem of those people retiring on inadequate income levels.
Martin Birks: Quite simply by alerting every customer with a maturing pension fund to the competitive advantages of any open market option. If they have an IFA they will more than likely be doing that anyway. If they do not, they should be put in touch with an IFA search database and advised strongly to look elsewhere. Both the ABI and FSA have set out initiatives to encourage greater exercise of the open market option.
What should the Treasury's consultation paper on annuities address as the most important considerations in annuity reform?
Nigel Stammers: Although there has been a lot of focus on the age 75 rule, more fundamental reform is needed, encompassing the pension system as a whole. For example, allowing occupational scheme members to stagger retirement gradually by drawing pension while still working.
Any reform must recognise there is no one size that fits all – different circumstances dictate different solutions. It should also recognise that annuities, despite all the criticisms, are still the only way to generate an income guaranteed for life – which for the majority who retire on small pension funds remains a basic requirement.
Martin Clarke: The funding issue of pensions and the size of the pot to purchase an income is still the real crux of the problem. The most important consideration is how to encourage consumers to save enough to buy an annuity that provides adequate income for their retirement. Then we need a solution that is fair, flexible and fitting and which pays a minimum income level and provides safety from capital erosion.
Issues such as the age limit of 75 affect the minority of people in the UK who do not rely on a pension annuity for their sole income source. It will be interesting to keep an eye on Ireland, where the requirement to purchase an annuity was abolished in 1999 and new rules introduced that allow some flexibility above certain minimum income levels.
Martin Birks: There may be a fixation with the fact that the average pension fund is only £30,000, removing any sense of urgency to deal with what is then seen as a “rich person's issue”.
That misses the point – in 20 years time I wonder what the average fund would be if people did not have to use all of their fund to buy an annuity, and could have gained lifetime access to some of the funds? It is the lack of access that limits the funding, and that is why average funds will always be small.
Will pension credits, with their 40 per cent tax levy, achieve their objectives in the current form?
Nigel Stammers: If pension credits constitute a 40 per cent tax levy, then meanstesting without them would constitute a 100 per cent tax levy, so they certainly are achieving something.
What both industry and Government would like is to be able to make the clear statement that it will always pay to save.
Further fine-tuning to the bill around the areas of those without full entitlement to state pension and women aged between 60 and 65, coupled with clearer guidance from the FSA, could remove the advice complication.
Martin Clarke: It is difficult to get wildly enthusiastic about the new pension credit and its two constituent parts, which will replace the minimum income guarantee in 2003. We still live in a state dependency culture with many people on average working incomes still living under a misapprehension that the state, possibly aided by a little personal provision, will see them all right.
This perception needs to be changed drastically and swiftly. While the pension credit has well-meaning intent, it will not and cannot address this fundamental issue on its own.
Martin Birks: A reward of 40 per cent or a 40 per cent tax? Government ministers think most people will understand the rules. Providers and IFAs, however, now need to bear in mind any advice given to lower-earning older people when funding pensions, however they may be branded.
They may even be contemplating writing to some customers to make them aware of the risks of under-funding. There is a high jump bar, above which funding makes sense because you are better off, but miss the bar and you might think you have been short-changed. The height of the bar? Certainly a lot more than the current average pension fund.
Are defined-benefit schemes dead in the water? What does this mean for pension schemes?
Nigel Stammers: There is no doubt that the trend for defined-benefit schemes to switch to defined contribution is accelerating – successive measures aimed at discouraging a tiny minority of unscrupulous employers have taken their toll on the majority who genuinely want to help their employees.
Equally worrying, many younger employees no longer perceive a defined-benefit scheme as a benefit until they are older when it is too late. Is there hope? It is now or never – the Revenue tax review and the Pickering review of pension regulations, aided by the Government's pension education programme, could halt the trend.
Martin Clarke: The recent prolonged downturn in world stockmarkets is likely to be the final nail in the coffin for what many consider to be the jewel in the crown of pension provision.
Having to match and fund known scheme liabilities is clearly causing problems for a number of schemes and has led to the changes we have seen in investment policy, for example, Boots, as well as the entry and qualification period for a number of schemes.
It seems likely that the cost of individual provision and responsibility will have to increase. This does not mean, however, that the employers should be abdicating their welfare responsibilities to their staff.
Martin Birks: In their current generous format, yes. However, there are tweaks that employers can apply if they want to reduce the costs: reduce benefits down from 1/60th to 1/80th, introduce an element of salary capping above which defined contribution applies, possibly even stop defined-benefit contracting-out.
In some cases, they might want to put up costs. In most cases, they will be stopping entry to the defined-benefit scheme for new members, which implies a degree of rigor mortis.
Should National Insurance contributions be raised for the self-employed, as the Department for Work and Pensions is believed to be considering?
Nigel Stammers: With the focus of stakeholder on employers, the self-employed have tended to be overlooked lately, despite being identified as a key under-pensioned segment in the original pensions Green Paper of 1998.
Although unlikely to be a popular move with the self-employed, many of whom have low earnings, bringing them within the S2P net is an obvious step.
As highlighted in the recent report from the pension provision group, this could be set to coincide with the time when S2P goes flat-rate to give best value to lowest earners and, of course, there would be the usual option for higher earners to contract out.
Martin Clarke: Self-employed people pay less National Insurance because they get less reward from the welfare benefit system – for example, no second state pension and reduced sickness or maternity pay. Because of this, it is going to be hard to make the case that the self-employed should increase their contributions, especially when even more people are being encouraged to set up their own businesses.
If the Government is trying to encourage more self-provision when funding for retirement, it is unlikely to help its cause by taking a greater slice of their earned income.
Martin Birks: Yes, they ought to accrue state second pension. To a large degree, they could resecure these benefits back in the form of contracting out of the state scheme. It would be perceived as a tax hike but it is the only way to level the playing field between employed and self-employed.
However, if this was the first step towards compul-sion for them, they would need to be clear how the pension credit might affect any pension funds that they might accrue.
Martin Clarke, general manager(marketing), CIS
Martin Birks, asset accumulation leader,RSA