We can now look forward to a three tier state pension system if the recommendations of Lord Turner’s Pensions Commission are adopted by Government. First tier will be an improved basic state pension, revalued in line with earnings, not prices. Second tier will be a flat rate state second pension, an evolution of SERPS now so changed that its parent, Barbara Castle, would no longer recognise it. And the third tier will be the new National Pension Savings Scheme or NPSS as we will come to know it.
I was re-reading my biography of Barbara Castle last week and she forcibly made the point that she invented SERPS for those workers who were not in good occupational pension schemes. Which interestingly is exactly the sentiment that Turner says prompted his NPSS. If you sit in this game long enough, it comes around again.
Except whereas SERPS offered a very different alternative to occupational pensions, the proposed NPSS looks remarkably like the vehicle most employers are offering today – it is a funded pension, with money purchase benefits and offering matching contributions from employers.
Yes, NPSS is really a great big stakeholder pension. Only it has two important differences from the stakeholder or GPP schemes that IFAs have been selling to date.
Firstly, there is no choice of provider. Just one, namely the State, which will run all the administration and customer service. The second difference is that there is no provision for financial advice.
After three years of careful deliberation, the Pensions Commission have identified workplace pensions as the way forward and realised the need for employer contributions to share the burden of pension provision jointly with the employees. The proposals for auto-enrolment and compulsory matching are very powerful. I welcome them but as with any powerful tool they need to be carefully deployed.
I do wonder if the Commission actually understands what goes on in the workplace? They seem to have over-looked the important role that distributors play, encouraging staff to join, resolving queries, building up confidence and helping employees to decide how much to pay. In my view, these are all an essential part of the process of helping people to save for retirement and they are not just replaced with the concept of auto-enrolment. Proof, if you needed it, is to be found in any large multi-site employer – at some sites membership will be much higher than at others, and the reason always boils down to whether the pension plan has been successfully been sold into the local workforce.
But with the NPSS there will be no distribution at all, so I have to predict there will be many workplaces where the scheme will not take hold and where opting out will be regarded as the smart thing to do.
Sadly, the default contribution rates proposed by Lord Turner are not as generous as they appear at first reading. They are described by the Pensions Commission as 4% from the employee, 1% from the Government and 3% from the employer. Read the small print, and you will find that the employee contribution is 4% of gross pay, taken from net pay. And the 1% is just paying back the basic rate tax the employee has already paid. So the reality is that this is a scheme with 5% employee contribution and 3% employer contribution.
This is a continued shift of the burden of cost away from employer and onto employee. Traditional final salary schemes ran with the employer paying roughly twice what their staff paid. SERPS also ran on a roughly 2:1 ratio. More modern money purchase schemes have been on £1 for £1 matching, with employer and employee paying equal shares. But Turner now proposes a further shift, with a new ratio of 5:3 stacked in the employer’s favour.
On page 358 of their telephone directory sized report, the Commission admit that their proposed contribution rates “will not secure the replacement rates to which many people will aspire”. They can see that people will need to save more, but propose nobody to advise them of this, or how much to save, or when to save it. All they propose is that people should get a written communication reminding them that NPSS can take additional voluntary contributions. That is laughable.
We will use the coming months to lobby for the importance of financial advice. It is not, as Turner seems to think, just a cost that can be pruned from the process and discarded by the wayside.
The stakes are high – the proposed NPSS is an attack on the traditional framework of corporate pensions in the UK, where employers have used good pension schemes as a competitive part of their remuneration package. If we lose this battle, then company pensions will be dumbed down to a mere 8% of upper tier earnings, and a further major transfer of welfare provision to the State will have taken place.