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Put focus on value rather than costs

Increase in state pension age
Rather than one specific state pension age, we would prefer to see a flexible decade of retirement, during which benefits can be taken or can be delayed.

The basic state pension will be increased in line with average earnings as opposed to prices, probably from 2012
This is to be welcomed although the changes need to be made as soon as possible.

State second pension to become flat-rate by 2030 and number of years to qualify for full basic state pension will reduce from 39 to 30, from 2010
Both provisions to be welcomed, in the absence of a “citizenship” approach which would have been preferable.

There will be a number of other changes including measures to reduce means-testing
Abolition of means testing must be one of the cornerstones of reform. If people are to be encouraged to save they must get the benefit of that saving.

The Government needs to remove the disincentives in the system, such as means-testing.

Contracting out to be abolished
There are pros and cons and it needs full consultation. The current system is too complicated and there would be savings from simplifying.

The NPSS (personal accounts). Who will administer such a scheme?
What is so fundamentally wrong with the current com-pany-based infrastructure?

The life industry is well regulated, has strong levels of capital reserves and has customer service as its priority.

It has invested heavily in support systems and infrastructure and runs admin systems and group pension schemes highly efficiently.

We really do not need another expensive and risky state system.

Who will be accountable for the scheme?
If the scheme is set up as a state-run scheme, perhaps with limited funds chosen by the Government, who will be accountable if it fails to deliver?

Cost
The focus for the Government should be on addressing the lack of demand for pensions among the public. Arguing over a 0.3 per cent or 0.7 per cent management charge is missing the point.

Much has been made by Lord Turner of the Swedish pension model being managed on an annual fee of 0.3 per cent. The system is heavily subsidised by the Swedish government and the true cost is around 0.6 per cent. The focus on cost alone is misguided. The overall net rate of return promoted is the only true measure of value.

We accept the need to have some cheaper funds with low-cost admin available but choice, advice and education will lead the public to recognise value rather than cost. This is the only proven way to engage people and generate demand.

Anecdotal evidence suggests that administration of large schemes can currently be arranged for less than the original stakeholder annual charge of 1 per cent. The circa 1 per cent cost often associated with the industry is based on personal fund/account selection and includes advice/guidance and distribution costs.

If these are stripped out, the actual admin costs are nearer to the rates referred to latterly by Lord Turner.

Funding levels
We have concerns over the proposed funding level of, employee contribution of 4 per cent of earnings, employer contributions of 3 per cent and 1 per cent from tax relief. This is not sufficient to provide a satisfactory level of income in retirement, particularly with the effect of means testing.

Levelling down
The prescribed level of funding is well below the average occupational pension scheme. This could encourage many employers with good money-purchase or final-salary schemes to dump them in favour of an inferior, and in many ways more complex scheme.

Employer participation
The proposed scheme is, in effect, compulsory for employers and will be seen as a new tax. This could lead to practices which could encourage the promotion of opting out. An answer may be for an incentive for small employers based on the take-up of the workforce. This could be a tax or NI credit.

Suitability
If there is no scope for any advice, who will advise on whether membership of the scheme is suitable? Means-testing may mean short-term membership may not be beneficial, particularly for those on low incomes, and an individual’s financial circumstances may also mean that other use of resources is more effective.

This is very important point and potentially litigious.

Investment options
There will need to be a range of funds. The investment profile of a 22-year-old is unlikely to be the same as a 57-year-old. Would it not make sense to use existing funds and to “grade” them for specific purposes?

Taking benefits
Serious thought needs to be given to the ways of taking benefits. Must there be annuity purchase, if so level or escalating? Will there be annuity providers willing to take small annuity purchase amounts? Who will provide the advice about ann- uity purchase and factors such as the effect of inflation?

Will there be a triviality rule and how will this be positioned as there are likely to be a lot of small funds?

Conclusion
The key point of any reform package must be to stimulate demand, to engage the public in the pension debate and to make them want to save for their future.

If there is a new national scheme, it must not pander to the lowest common denominator and be seen as the option of last resort. Consumers do not just buy on price, particularly if they value the product.

We strongly believe in the need for a Government-sponsored education initiative and the provision of communication and information through the workplace.

A couple of notes of caution:
None of this will get anywhere without changes to means-testing. If there is any danger that a new scheme will inflict serious damage to the existing infrastructure, then this should be considered carefully.

One final point, in positioning the package of reforms, Gordon Brown made them subject to the fiscal situation at the time. We must be certain that, whatever the final package, that it will happen.

We cannot proceed on even a provisional basis. Certainty and consensus are vital.

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