A few years ago, I was asked by Selestia, the investment platform which subsequently merged with Skandia, whether I would like to be among several guest speakers at a series of dinners for IFAs it was organising around the UK. I leapt at the chance – not only was it a great opportunity to meet scores of IFAs from across the UK but the other speakers included Ros Altmann.
I have respected her for years for having made one of the most powerful and ultimately victorious – contributions in support of pension rights for over 100,000 occupational scheme members whose companies went belly-up, so the opportunity to hear what she had to say was too good to miss.
Naturally, we were each being invited to speak our minds on a range of topics – and Selestia was keen on full, frank and open discussions both from its audience and its guest contributors.
One of the areas where we found ourselves disagreeing was over the Government’s national pensions savings scheme, which has now become the national employment savings trust.
I hope she won’t think I am traducing her arguments if I state that among her many concerns was the fact that the NPSS, as was, risked being
a counter-productive failure because of the Government’s insistence on reducing other state benefits as the size of workers’ pension pot grew.
In effect, for someone to retire on similar overall benefits, they would need a pension pot of at least £20,000, something Ros felt would be most unlikely for the majority of savers, particularly anyone over the age of 45 who did not have enough time for the value of their contributions to grow.
By contrast, I argued that whatever its many undoubted faults, the NPSS/Nest offered millions of young workers in particular the opportunity to build up a small but significant nest egg that would stand them in good stead when they retired 30 years or more down the line.
Yes, there was a strong argument in favour of reforming the state system so people with savings would not be hit by a massive cut in their benefits but, equally, for any adviser to recommend that a 25-year-old should not join a Government-supported pension scheme because of the possibility their state benefits might be affected in 30 or 40 years time smacked of desperation.
I was not alone in imagining a benign outcome for the NPSS/Nest. One set of figures I read suggested that, based on the 8 per cent combined
contribution rate for employers and employees, as well as the tax rebate, a 25-year-old earning £20,000 a year could expect to build up a pot worth more than £141,000 by 65, assuming annual fund growth of 3.5 per cent above inflation and charges. That figure was based on inflationmatching pay rises only.
Based on annuity rates back then, this lump sum would have bought a joint-life annuity at 65 for a non-smoking male of more than £500 a month, increasing by 3 per cent a year and guaran teed for five years, with a spouse’s pension of 50 per cent.
A later retirement age of 67 to 69 might have seen that annuity increase to £600 a month and almost £700 a month respectively, in addition to the basic state pension.
The key argument in all such cases was that workers should be able to build up their pension pot as quickly as possible. Yet everything the
Government has done in the past six months has meant sabotaging such an affort.
Last October, it was firstrevealed that the scheme would now be phased in, with only the biggest employers launching in October 2012 and smaller employers joining up over the following three years. One month later, as part of his pre-Budget report package, the Chancellor admitted
the phasing-in for smaller employers will be extended to 2017, possibly later.
According to Buck Consultants, every one-year delay effectively reduces the pension pot for an individual by around 5 per cent, equivalent to around £300 a year on a salary of £25,000. Buck Consultants estimated that such a delay might cost individuals up to 25 per cent of their future fund value.
As if that were not enough, last week, the Pension Accounts Delivery Authority said that all contributions into this scheme would be subject to a 2 per cent charge, on top of an already known annual management fee of 0.3 per cent. This fee will be charged on employer contributions –
and even the Government’s own tax rebate into the scheme.
Pada claims this new charge aims to cover Nest’s start-up costs and once they have been repaid, it will be removed. Yet this will not happen for
up to 20 years. Meanwhile, anyone retiring at 65 in, say, 2023 – which means they are 52 at present – faces an equivalent annual charge of almost 0.5 per cent on their five years of contributions. That is dearer than many private pensions.
Ros Altmann, ever present with a great turn of phrase, commented on this latest volte-face by the Government: “Call me cynical but this scheme has disaster written all over it.” Increasingly, I fear she’s right.
Nic Cicutti can be contacted at email@example.com