This pension credit business has been bothering me. When I read the details of the proposals in the pre-Budget report, I was disappointed to see no account had been taken of the concerns many people in the industry have over the distribution of pensions to groups of employees.
The State Pension Credit Bill was published on November 29 and that means the state pension credit will almost certainly be introduced in 2003.
Some of us have been going on about the problems this will pose for pension distributors but it has not made any difference.
Don't get me wrong, I am fully in favour of the minimum income guarantee. It is a good thing and good social policy. Over a million pensioners will benefit from it. My concern is that while these worthwhile improvements are being made for the benefit of existing pensioners, those of us trying to encourage future generations of pensioners to save for retirement have found we now have a difficult obstacle in our path – the pension credit.
The way the pension credit will work with the minimum income guarantee just does not make sense to me.
Selling pensions these days is a bit like selling grapes – it is uneconomic to sell them individually, they are best sold in bunches.
The thrust behind the stakeholder reforms has been to engage employers in the distribution process and to heighten the probability of group distribution through group stakeholder, grouped personal pension or full-blown group occupational schemes, whatever. This has been highly successful. But distribution to groups of employees can only be undertaken with the greatest of care.
I quote directly from the FSA's own policy statement on this issue: “…SHPs are intended by government to be mass-market products but it nonetheless remains important that only those for whom the product is suitable should buy one.”
In this context, the FSA was writing about worksite marketing to groups of employees and, specifically, the distribution of stakeholder pensions. It was stressing that what is good for a group of employees in general cannot be assumed to be suitable for any individual within that group in particular. The dilemma facing those distributing stakeholder pensions to groups of employees is that careless distribution will not be tolerated.
The problem is pensions today are not intrinsically suitable for all the people in the workforce. There are better investments for many who will get a pension from the state in the form of the minimum income guarantee if they choose not to save in a pension.
The pension credit is supposed to stop this being the case by making sure “…today's workers have a clear incentive to save.” and is introduced with the statement that “The Pension Credit will make sure that it pays to save.”
The problem is although it may pay to save, it will not always pay to save in a pension. The pension credit works by “allowing” some people to keep 60 per cent of the value of their pension savings. They are allowed to keep 60 per cent of their pension savings as a “reward” for having made the savings. But how can 60 per cent of a pension be better than 100 per cent of, say, an Isa or any other disinvestible non-income-producing product? That is the problem facing advi-sers and employers encouraging groups of employees to join stakeholder pension schemes – if suitable products are to be recommended there is no substitution for individual advice, and the costs that go with it.
I noticed today that the work and pensions select committee is to hold an inquiry to examine the proposals for the pension credit. It is asking for submissions by January 11, 2002.I had better mark the date.
Steve Bee is head of pensions strategy at Scottish Life