It will not come as any great shock to you but I believe the new pension legislation will fail to stimulate the long-term savings market.
The question remains where are the new initiatives that will create the climate for an upturn in private pension savings?
Is it to be the new Sandler product suite? Much of what Sandler proposes bears similarities to the stakeholder pension model. Sales of stakeholder pensions passed one million pol-icies in June 2002 but have steadily fallen each month since. A high proportion of stakeholder policies were simply switches from existing pension arrangements.
How many first-time pension savers bought stakeholder plans? No reliable data is available but an intuitive estimate is a few hundred thousand at best from a three million target market. A fair proportion of policies are set up by high-earners establishing a pension for dependants, largely for tax-break reasons.
Most industry pundits predicted a low take-up, convinced that a simple lowcharge product would not be sufficient incentive for the target market to go out and buy a pension. Historically, pensions have had to be sold because people need specialist advice about long-term savings. Too many people still believe that the state will look after them in old age.
Low charges are not the real issue here. Even a zero-charge stakeholder product would not have resulted in significantly more sales without access to proper advice.
The stakeholder charge cap has resulted in lower commission payments. Many advisers have taken the view that, based on commission payable, it is simply not cost-effective to provide advice on typical small stakeholder schemes.
A big worry is that the Government will not heed the warnings from the industry on the stakeholder experience.
The Sandler suite of products would have a clear self-help buying process to enable the consumer to choose the product and savings level without the need for specialist advice. The low-charge justification is that advice is simplified to a decision tree process so distribution costs are reduced and the consumer benefits from low charges.
The Government, via the FSA, has undertaken consumer research to check that the self-help sales process consistently achieves a result that meets the consumers' needs. The FSA has reported that in a significant proportion of cases, those who were recommended a pension product received less than good outcomes.
FSA research findings should be a clear warning that inappropriate financial decisions could be taken by consumers who go it alone or with minimal advice.
To ensure that at least some advice is available, the Treasury has increased the current stakeholder charge cap from 1 per cent to 1.5 per cent for the first 10 years and then reducing to 1 per cent. It is good to see the Treasury has taken some notice of the input it has had from the savings industry but the increase is very modest and will still not be enough to pay for more than minimal face-to-face advice.
More thought is needed before product providers decide on their responses to the new charge cap but it looks likely that the increase will be too modest to have much impact on the take-up of pensions in the market.
After the results of its consumer research, the FSA is now consulting on whether it would be appropriate to include the stakeholder pension in the scope of the simplified sales regime.
If pensions are not included and the FSA accepts that more detailed advice is needed for pensions, it will be interesting to see how that advice can be paid for.
What Government actions would help accelerate pension savings? The tax concession package has to be more attractive than those in the new simplified tax proposals.
In 1997, many will recall Gordon Brown's decision to stop pension funds reclaiming tax credits on UK dividends. The withdrawal has created roughly a £5bn a year shortfall on funds invested in pension schemes.
The Government should ideally reinstate this concession as it would certainly improve boost pension fund returns but this change alone would not be the carrot needed for pensions. Nor is it realistic to expect this to happen in the short term as the resulting hole in the Government's revenue would need to be filled somehow.
The Treasury no doubt believes that income tax relief on contributions, a tax-free lump sum at retirement and gross investment roll-up are adequate incentives.
They are valuable concessions but the fact is that, in the round, the package is not attractive enough to encourage large numbers of people earning less than the average to save in the long term.
Greater inducements are needed to persuade more people to commit their income and savings to pension schemes, even if further concessions come with strings such as funds cannot be withdrawn until age 55 or even later.
Successful pension schemes in terms of membership take-up are those where the employer contributes. Usually, the employee is also required to contribute but the prospect of the employer matching employee contributions or better is a very strong incentive for employees to sign-up.
Employee take-up is transformed by employer contri-butions. Pension scheme membership normally ranges from 0 to 5 per cent of the workforce where the employer contributes nothing. But for otherwise similar situations where the employer makes a reasonable contribution, membership is often over 70 per cent.
I am encouraged that the Government is exploring ways of increasing membership take-up of employer-sponsored schemes but these ideas seem to stop short of providing any real incentive for employers to contribute.
We need the Government to make a significant move. For example, paying matching contributions into employee pension plans for new savers , say, for five years.
In the short term, this would cost the Exchequer but, importantly, it could kickstart a major step-growth in retirement savings, creating a national culture that expects private pensions to be part of our personal assets.
In the longer term, the investment in “a matching contribution injection” would be more than offset by less reliance on state pensions.