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Passbook to retirement income?

Commentators looking for ideas on how to improve or reconstruct UK pensions have often gone abroad to see what overseas models have to offer. Singapore, Australia, Chile and the US all have very different pension systems, parts of which could be used in the UK.

One aspect of these overseas schemes has created real interest in the UK. Not the relative parts played by the state and the individual, nor whether the systems depend on voluntary saving or compulsion, nor even the fine detail like the impact of charges. Rather, it is the tangible evidence that a pension is personal, is valuable, and is easily understood. The tangible evidence creating this interest and excitement is the pensions passbook.

The simplicity of the individual passbooks which millions of building society members, and shareholders, have appreciated over many years could become the means by which more people, particularly low-earners, start creating their much needed retirement income. This has happened in Chile to great effect. Whatever the shortcomings of the Chilean model, the passbook system has forced providers to communicate with planholders in simple terms, broken down barriers between faceless companies and individuals and has encouraged planholders to top up contributions regularly.

Many people have criticised, rightly, UK pension providers for complicating pensions, although the regulatory environment and the tax rules have also contributed. The pocket-sized pensions passbook would not allow for complexity. There simply is not space for any more than a brief description of the key features.

The Adam Smith Institute launched its passbook pension in July, supported by a number of insurers. The institute argues that its proposals meet the high level and specific political goals expressed by Government ministers. Although passbook pensions would be contracts between the individual and the provider there are critical, although perhaps limited, links with employers and other "gateways" such as trade unions, professional bodies and trade associations, which, to date, have been muted in their responses to these potential opportunities.

We shall have to wait until the Green Paper on pensions in 1998 to see if the passbook pension concept has sufficient "collective" aspects to be considered a suitable stakeholder pension by the Government.

The aspect of passbook pensions which is most intriguing is the link with state pensions. People over the age of 50 would remain in the state scheme, with people under 50 choosing between the state scheme and their private passbook pension which would receive redirected National Insurance contributions, like contracted-out personal pensions today. The amount of state pension already secured would be personalised and shown in the pension passbook as a "state recognition bond", the proceeds of which would be passed to the pension provider on the member&#39s retirement. Before retirement, however, the member would see in his passbook a significant amount representing the current value of the recognition bond, an amount probably far greater than the member&#39s own regular savings.

In Chile, the value of the recognition bond was instrumental in creating a sense of personal ownership and wealth. In the UK, where the Government has pledged to retain the basic old age pension and Serps, a passbook system on the lines of the Adam Smith Institute&#39s may be more difficult to launch. Even if the Government wanted to abolish Serps, it may find it difficult to sell the idea to the electorate, having been so critical of the last Government whose Basic Pension Plus idea involved a switch from pay as you go to funded private provision, albeit with a state guarantee.

Contributions to passbook pensions would come from individuals by any of three routes – by payroll deduction linked to the Contributions Agency, by the system which operates today for personal pensions, largely direct debit, and by a third-party clearing system which would collect contributions from individuals or gateway groups and pass them electronically to the passbook pension providers.

Unfortunately, there is no recommendation that employers would be obliged to pay contributions into the passbook pension if requested by the employee, as an alternative to paying contributions into the employer&#39s occupational pension scheme.

Nevertheless, a passbook pension is worthwhile developing as a means of creating trust between providers and individuals, especially those who are not saving for retirement because they are confused by the jargon which surrounds products. A passbook system would also encourage much needed access to pensions by the public.


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