Everyone is talking about simplification in financial services and how important this is to get more people saving. Nothing can be more true than in the pension arena where, frankly, far too many people are saving little or nothing and many face the prospect of a miserable retirement.
The Pension Green Paper is intended to sweep away complexity and get people pouring money into saving for their retirement. Well, there are a number of suggestions and recommendations that will undoubtedly help get pensions on people's radar. However, the proposals fall far short of the radical solution needed to get the situation sorted. We must have further measures to encourage people to save.
There are a number of issues that must be addressed to ensure success:
Significant changes to infrastructure and computer systems, together with additional communications to clients, will come with a hefty price tag.
Ultimately, any costs could be borne by the consumer so it is important for the Government to understand that there should be a balance in responsibilities, and thus costs, between itself and providers.
We have said from day one that the 1 per cent price cap will be a barrier to success. The level of the cap must be reconsidered if mass-market distribution of pensions is to be achieved. Products have to be attractive to buy for consumers and attractive to sell for providers and distributors.
The changes could mean more onerous responsibilities for providers and this also must be taken into account when considering the charge cap.
Incentives for employers
The employer is key in narrowing the savings gap. Employers need financial incentives to encourage them to establish schemes, contribute to them and deliver information about pension saving.
Incentives for individuals
We need a thorough review of state benefits and their interaction with private pensions as currently it is too complicated. To get people saving, they need to have the confidence that any private pension they pay into will pay out in addition to their state pension.
The greatest barrier to saving, particularly for the lower paid, has to be means-tested benefits. These serve as a disincentive to saving and further complicate advice on private pension provision.
In relation to the lifetime limit, we understand the Government's position on this but have some reservations about the unintended consequences it may have, for example, if people are penalised for making good investment choices.
We believe the Government should consider alternative approaches such as a limit based on lifetime contributions rather than benefit value. The level should increase in line with earnings or the Retail Price Index plus an appropriate percentage.
Contracting-out should be abolished or the terms on which National Insurance rebates are calculated should be changed to reflect the risks involved. Unless the rebates are improved, people will increasingly be advised not to accept the risk of contracting out and remain in the state second pension or, if already contracted out, to rejoin it.
Simplification of the tax regime is to be welcomed. We believe that the proposals can be simplified further by adopting a more risk-based approach to tax avoidance.
We support the removal of the retirement cliff edge which is damaging both to the economy and the well-being of individuals who wish to remain active and employed.
We believe the proposals should go further, for example, a level playing field between annuities and drawdown and further flexibility for annuities, while money-back options on annuities should not be limited to age 75.
We believe that a piecemeal approach to implementation will confuse consumers and further increase the costs of making the changes. A single implementation date, with a further transitional period to allow for settling in, should be considered.
We have recommended that implementation is deferred until April 2005 at the earliest. We also urge the Government to give the changes a chance by committing to a moratorium on further fundamental change of at least five years.
We look forward to working in partnership with the Government and regulators to develop and improve on the proposals to deliver them within a realistic and achievable timeframe.
Peter Hales is sales & marketing director at Norwich Union