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Is pension structure on solid ground?

Following the publication of the Government’s review of Nest and auto-enrolment, is the structure of the new pension system correct?

Ian Naismith, Head of pensions market development, Scottish Widows
Ian Naismith, Head of pensions market development, Scottish Widows

We welcome the results of the review of automatic enrolment and Nest, which are in line with what Scottish Widows recommended. The Scottish Widows UK Pensions report, which has been measuring retirement preparation over the last six years, has consistently found that only around half of those who could and should be preparing financially for retirement are saving enough and the overall position worsened in 2010.

Automatic enrolment should give a welcome boost to savings, particularly among lower-earning groups, but to ensure that as many as possible choose to remain in their schemes, there needs to be a clear message that it pays to save. The Government’s proposals for reform of state pensions should help provide reassurance on this.

We are pleased that the minimum income for automatic enrolment has been increased, which will mean that those who cannot reasonably be expected to afford pension contributions are not automatically enrolled and also that the minimum monthly payment for those automatically enrolled will be more than £10 after the initial transitional period. This should improve the finances of Nest and other pension schemes by removing the need to administer trivial payments.

To ensure that as many as possible choose to remain in their schemes, there needs to be a clear message that it pays to save

We welcome the increased flexibility for employers. We also welcome the decision not to change key elements of the existing legislation, including the implementation timetable, the involvement of all employers regardless of size, the establishment of Nest and the measures designed to ensure that Nest remains focused on its target market during its establishment (the contribution cap and ban on transfers until 2017). We believe that all of these are key to the success of pension reform.

Finally, we are pleased that the review team has recognised the need for consistency between trust-based and contract-based pensions in matters such as trivial commutation and treatment of early leavers. We urge the Government to address these issues urgently.

Alan Easter, Strategy and business development director, Honister Capital
Alan Easter, Strategy & business development director, Honister Capital

Let’s be clear. People don’t save enough for their retirement, the welfare state cannot afford the costs it already has and the only thing that is going to happen to state pensions is a slow and lingering reduction until we find a Government brave enough to bite the bullet and make the changes required. The current plethora of activity is akin to that old cliché about deckchairs and sinking ships.

Positive action to increase savings must therefore be a good thing? Well, yes, obviously. The issue for me isn’t auto-enrolment, even though it could be seen as a stealth tax, it is the product used in the solution. Think about this logically. A Government-funded administration service outsourced to a foreign country when the CSR has put 500,000 public sector jobs at risk in the UK.

An industry that has been providing these types of schemes for hundreds of years sidelined for the sake of a few basis points.

I cannot under-stand, whatever way I look at this, why stake-holder pension was not just adopted as the auto-enrolment product of choice

A Government saddled with generational debt lending a new initiative an as yet unquantified amount of capital, with no idea when it will be repaid.
A consumer charge that cannot be calculated with a built-in financial incentive to join later rather than now. And from what I can understand, an investment choice designed to fail from outset as a singular member choice.

As that wonderfully funny, if a little bit inappropriate, TV series the Inbetweeners would say – genius.

There is, of course, a product that is already in existence, has built in incentives, is administered by those people who have been doing it for hundreds of years already, is part of consumer and HR language and whose pricing structure has been the basis of regulatory foundations for years.

I cannot understand, whatever way I look at this, why stakeholder pension was not just adopted as the auto-enrolment product of choice. More jobs in the UK, no change of language or behaviour, robust regulatory procedures already in place, wide fund choices and robust administration systems.

Oh and, of course, financially strong companies providing the product that have not required Government bailouts or need loans in order to get started. I do suspect also that the cost of legislative changes to make stakeholder mandatory in the same way as Nest would probably be less than the rebranding from Pada as well.

Maybe I am just not clever enough to fully understand but as old and wise people say, the trouble with common sense is that it isn’t that common.

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  1. Alan Easter puts the situation brilliantly.

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