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Turner’s big picture

The Turner report depicts a bleak pension landscape unless measures are taken to raise the retirement age and reform the state pension but Hargreaves Lansdown head of pensions research Tom McPhail argues that some of the Pensions Commission’s ideas are incompletely envisaged and predicts that the Government will brush aside many of his proposals

So, after a couple of weeks of leaks and tweaks, the Pensions Commission finally delivered its second report last Wednesday, bringing the media feeding frenzy on pensions to a glorious climax.

There are three key areas of recommendation which demand attention – raising the state retirement age, reforming the state pension and introducing a new low-cost pension scheme.

The proposal for a higher retirement age makes sense. The inevitable downside to the longevity now being enjoyed by the British population is that an increase in the retirement age is necessary if we are not to spend our declining years fishing under the sofa for discarded 2p pieces.

The entertaining political dimension to this is that the trade unions are claim- ing squatter’s rights on the public sector pension schemes and demanding the freedom to retire on a full pension at 60, paid for by the rest of the population.

Something is going to have to give and the only question here is whether Chancellor Gordon Brown will have the courage to renegotiate the deal himself or whether he will pass the problem on to a later Government to deal with. Whatever he does, he is going to get criticised for it. Fortunately, his current levels of popularity mean that this probably will not bother him too much.

The reforms of the state pension proposed by Adair Turner are a compromise between what is desirable, what is affordable and what is practical. I would have preferred a move directly to a full universal state pension, even if it would mean that, in the words of the Daily Express, we would be paying pensions to “work-shy scroungers”.

What we have instead is a fudge, with split retirement ages and two different accrual mechanisms. Turner argues that it will eventually make life simpler although some may have already lost the will to live before then.

The National Pension Savings Scheme is the interesting proposal from the pension industry’s point of view. Turner argues that the present system is inefficient and does not serve low earners adequately. This is true up to a point but I do not agree with his proposition that the only way to fix it is to introduce a new savings scheme.

I am interested in the various bolt-on options, such as the pension clearing house for collecting contributions and the auto-enrolment concept coupled with compulsory employer contributions. Do all these and I suspect that the existing pension infrastructure could deliver more effectively and with lower risks than Turner’s proposed NPSS. To me, the NPSS looks like an idea which has arrived four years too late.

Personally, I do not think that the Government will have the appetite for the NPSS, anyway. Even if it does come to pass, I am not sure that it would take too much business away from IFAs. The NPSS is not designed for IFAs’ core market of people with above-average income. It is intended to serve the low-paid masses, which is not IFA territory.

The most alarming aspect of the NPSS is that Turner appears to believe that it is OK to compel people to save (OK, not actually compel because they can opt out) into a defined-contribution pension without giving them the benefit of any advice. As Turner points out, they will be invested primarily in equities, which means that from time to time they will lose rather than make money. They will also have to contend with the annuitisation process at retirement.

I do not think that this will work. Our experience is that the people who buy financial products from us on a non-advisory basis are the ones who are comfortable that they know what they are doing. Under Turner, people will not have that luxury.

Two things will emerge from this. From time to time, things will go wrong and, when they do, investors will cast around for someone to blame. If it goes down this road, the Government will be making a rod for its own back and, after the debacle with final-salary schemes and the Financial Assistance Scheme, I imagine it is wary of such potential problems.

Entertainingly, Turner wants means-testing to go. Brown does not. Just about everyone apart from Brown believes that the pension credit is a mixed blessing – useful in the short term but a problem in the long term. For now, Brown is wedded to the idea of doling out little bags of money here and there. It will be interesting to see how he moves on from here.

Everything will now get fed through the political grinder for a few months, with draft legislation pencilled in for the spring. Much of what Turner proposes will fall by the wayside. At this stage, it would be ambitious to guess which bits will survive and which will not but it is up to IFAs to press their case with the decision makers as they go through the process of debate.

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