As might be expected from a report that is so long, the proposals contain both positive and negative features from the industry’s perspective.
The recognition that means testing is detrimental to private savings is welcome although the report proposes a gradual unwinding that is likely to take 10 to 20 years to have any significant impact. The same is true of the simplification of state pensions and contracting-out. These measures are required to encourage individuals to save for their own retirement. People need to understand that state pensions alone will not be able to provide an adequate income in retirement in future. This message will be diluted by retaining the complexities of gradually unwinding the state pension scheme.
The report effectively proposes soft compulsion for employees where they are auto-enrolled in an employer’s scheme and have to exercise an opt-out within a specified timescale if they do not wish to join. This measure would undoubtedly increase pension saving among employees as a group. However the proposal is that a new Government agency should collect and invest the contributions for employees (the NPSS) rather than through current pension schemes unless they can meet a stringent quality test.
It is the NPSS that is the most radical proposal from our point of view and if implemented would have a significant effect on the group money purchase market. It could also cause a hiatus, similar to planning blight, as employers wait for its potential introduction before they consider revising their pension schemes.
Our view is that the NPSS should not be the way forward and that leveraging on current industry expertise would be preferred. By this we do not mean that Life companies would be allowed to tender for the contract of running the NPSS.
There is a real danger that few SME employers would look beyond the proposed NPSS as a pension scheme for their workforce. It would advertise lower costs than those available through current plans and there would potentially be less administration for the employer and less risk as any problems would be the Government’s problems not the employers.
Current schemes would need to use auto-enrolment on entry and have a combined contribution rate of 8% or 9% to exempt employers from the NPSS requirement. Many SME schemes would not meet these requirements leading to a review and the potential loss of schemes from the private sector to the NPSS.
Why might an SME choose a GPP over the NPSS if this is adopted?
The Government does not have a great record in setting up new administrative /computer agencies to administer payments and records (e.g. CSA and the NHS new computer system). An employer abandoning a GPP that is running successfully could run into big problems with an untried Government scheme on such a huge scale.
Bigger employers are more likely to be interested in differentiation and a scheme that they can brand as their own.
We would hope that advice will still have a role to play in this market. There is no margin for any advice concerning the NPSS. The fund selection will be very limited and most individuals will be auto-enrolled in the default managed fund and pay their 4% contribution and that will be that.
The proposal to pay more tax relief initially and no tax free cash would be less advantageous for higher rate tax payers than the present system. A GPP type scheme would be more effective for higher paid employees. More to the point, even the less sophisticated worker may actually want access to a cash lump sum at retirement.
These are also likely to be the individuals more interested in extended fund choice, and indeed other investment options, that will be available after A-day.
Tax free cash is very popular and some employers would want to offer this as an alternative even to basic rate taxpayers. This proposal could also be the start of the much predicted end to higher rate tax relief and is a further argument for such individuals not deferring pension contributions.
All in all, we would see that the NPSS would change the GPP market to a superior ‘value added’ product for larger SMEs, giving benefits for higher rate taxpayers and stressing investment choice and the benefit of active management over a fund that would be so large it would effectively own much of the investment markets.
One last comment on the NPSS. Politicians take a pasting at present whenever the NHS falls down in service delivery. If the NPSS is run through a government agency, this is likely to add a similar political risk to the operation of the NPSS. After all, most employees will be contributing 4% of their salary to the scheme and have significant interest in it. Will politicians want to take on this additional political risk?