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Lord’s prayer

Andrea Tryphonides assesses the future for pension advice

The Pensions Commission’s final report on the state of the UK pension system has made it clear that advice does not factor into Lord Turner’s proposals.

But product providers and advisers argue that advice is the one differentiating factor that makes UK financial services successful. So, to what extent is Turner tuned out to the benefits already offered by our system?

Advisers and life offices have been quick to slam the proposals as unworkable and inefficient, forcing providers into cost cuts that could hit their businesses hard.

The report proposes a National Pension Savings Scheme to which employees are auto-enrolled but with the choice to opt out. The scheme would offer a selection of six to nine funds, with an annual charge of just 0.3 per cent.

Standard Life head of pensions policy John Lawson says: “We question whether the scheme can be run at that charge. In Sweden – on which the proposal is partly based – the scheme is more expen-sive and not particularly efficient. Swedish charges are heavily subsidised and the true cost is more like something between 0.65 and 1.19 per cent, depending on which funds are selected. Where is the evidence to show that the Government could run a similar scheme at 0.3 per cent?”

Turner’s team has already hit back at criticism of its figures. Pension comm-issioner Jeannie Drake says: “A pension scheme run on a 0.3 per cent annual fee would give individuals pensions around 30 per cent higher than current stakeholder charge levels. This is something tangible that can be understood by the public and, of course, there is an opt-out for the employer.

“We have looked closely at Sweden’s charges and, yes, we agree that they may be seen as expensive but we are proposing looking at both Swedish and American models and believe that our figures can be met.”

Scottish Life head of pensions strategy Steve Bee says: “Our employer-supported pension system is under threat by the NPSS. Why do away with something that is cost-effective relative to other forms of savings without taking into account the benefits of tax relief?”

An employer wanting to opt out of the scheme would have to match its terms. An employer opting out for a scheme with charges higher than 0.3 per cent would there- fore have to make up the difference through increased contributions. To keep a stakeholder scheme with a 1 per cent charge, for example, the combined employee and employer contribution would have to be 9 per cent.

Xafinity director Pat Wynne says: “How many small to medium-sized employers will choose to maintain current occupational pension schemes with all the risks that implies when they can abdicate responsibility to publicly-run schemes and reduce costs?”

Xafinity believes the proposals will create social tension, dividing public workers and higher paid professionals with generous and flexible benefits on the one hand and lower paid workers in the private sector on the other.

Advisers are balking at the proposals. Origen head of pension and product research Mark Stopard says the scheme could have a negative effect on private pension provision. Employers unable or unwilling to compete would dump their existing GPPs in favour of the new scheme.

He says: “More people would make contributions as a result of these proposals but for those contributing at present at a higher level, it would be likely to come down to the default contribution level. GPPs would effectively become AVC schemes for higher-rate taxpayers.”

Other IFAs claim the plans will make little difference to their businesses. Hargreaves Lansdown head of pensions research Tom McPhail questions whether Turner’s proposals will ever get off the ground.

He says: “Surely, Gordon Brown will look at the current system that we have in place today and see that half of Turner’s proposals can be implem-ented using systems that have been tried and tested by brokers and life and pension providers.”

Informed Choice managing director Nick Bamford has dismissed the proposals as “yet another Government proposal that will be long forgotten”.

But consultancy Deloitte warns that 60,000 life and pensions jobs, of which over 10,000 would come from the IFA sector, are on the line if the proposals go through. Partner Richard Baddon says: “The life and pension industry has invested an enormous amount of time in the infrastructure and support of highly regulated sales. The report is in danger of making the whole sector unnecessary.”

Aifa deputy director general Fay Goddard says there could be a significant impact on advice.

The Association of British Insurers says the proposals could result in an upsurge of fee-based advisers. Head of life and pensions Chris Kenny says if the bottom end of the market, which has traditionally been targeted by commission-based advisers, falls away, there could be scope for fee-based advice to reach a bigger part of the market.

Kenny says: “The Govern-ment has said it is interested in something sustainable. It needs to look at this for the private institutions too to enable today’s people to be appropriately served. By that I mean the role that advice can play in the private sector.”

Cazalet Financial Consulting principal Ned Cazalet believes the implications of the proposals could stretch a lot further than affecting the role of advisers and employers in UK pensions.

He says: “I cannot see the Government carrying this off with the Bank of England. If the public is spending less as a result of saving more, the Bank of England will have to cut interest rates which will make deposit accounts become less attractive and stop people saving. Remember, the Bank of England has an inflation target and it has a job to counteract underspending.”


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