View more on these topics

Unlucky 13 problems of turner’s reforms

Norwest Consultants principal Harry Katz outlines 13 reasons why the Pensions Commission report has failed small businesses and low-earners

The likely effects of the Pensions Commission report on employees in big companies have been well aired but small firms and the self-employed form a significant part of the total workforce, estimated at 54.8 per cent as at March.
What is Lord Turner doing for them? The same as the Government – trying to ury them as expeditiously as
possible.

At the advent of stakeholder, interested parties were slobbering at the thought of extra revenue. The usual suspects are now lauding Turner’s proposals and they are likely to be as wrong now as they were then.
How they expect to make money on 0.5 per cent – let alone 0.3 per cent – when they could not on 1 per cent is still to be seen. There remain a plethora of other issues which require clarification.

1 Prime Minister Tony Blair and Chancellor Gordon Brown have been arrogant enough to presume they will still be in power by 2012, the suggested start date of this new initiative. They may be right but if they are not, will a new Government still carry these reforms along?

2 Much has been made of soft compulsion. Presumably, this means National Insurance will be rebadged as a tax, which it is. I look forward to the public’s reaction when the 22 per cent tax band becomes 33 per cent, if not more, overnight.

3 The latest news is that people will only need 30 years of NI contributions to qualify for a full basic state pension. Oh yeah? So a 22-year-old graduate will have qualified by 52 but will not be able to receive the basic state pension until 68. What do the remaining 16 years’ contributions buy? MPs’ pensions, presumably.

4 What of non-compliance? I have not noticed the conspic-uous success of the Govern-ment in ensuring that its stakeholder edicts have been complied with. Why will Turner be any more successful? Small businesses are likely to stick up two fingers to the NPSS, just as they did to stakeholder.

5 If everyone did comply scrupulously, what would be the effect on tax revenues and Treasury cashflows? Recent figures show that borrowing is slowing and saving is increasing. If this is to gather further momentum once the NPSS is introduced, what will happen to the Chancellor’s economy which relies on debt and consumer spending?

6 What does an IFA do if someone has not joined their firm’s Turner pension because they have been discouraged from so doing by their employer? Have we got RU64 all over again?

Meanwhile, for those on, say, £75,000 a year, must they be offered this sub-standard product as a default? I work on a simple mandate. I do not expect clients to buy anything I do not already have, or would not buy myself. I certainly would not buy a Turner pension. Who wants an insured fund, anyway, when there are non-insured alternatives?

7 Will Turner pensions be seen as an even more downmarket product than stakeholder, with even more limited fund choice, appalling administration and pathetic paperwork? How much more sub-standard are these pensions going to become when the insurance companies’ margins are cut even further?

8 What the Government does not realise is that those firms that are contributing to group personal pensions and even defined-benefit schemes administered by life offices are going to rethink their policies. As Ned Cazalet has pointed out, group personal pensions have actually been regurgitated money. Will not the same be true of the NPSS? Higher contributions to better schemes are likely to evaporate as everyone dumbs down.

Some of this has been said before. Let us look at some new considerations.

9 The contribution by firms is likely to be anywhere between 3 to 5 per cent by the time we get to the enactment of this new pension and as usual the Government has displayed a lack of joined-up thinking. This pension is designed for lower earners, many of who I am sure fall within the minimum wage provisions. From October this year, the minimum wage is to increase by 5.9 per cent. Between 1999 and 2006, the minimum wage rose by 50 per cent.
This is all very well when corporate profits have been healthy, employment has been high and nobody has been taking a lot of interest. But add the minimum wage to the pension contributions and you are beginning to put real burdens on employers and particularly on small firms.

Some of us can remember selective employment tax. Although framed quite differently, it had the same effect. It was, in fact, a tax on labour and resulted in higher unemployment. Are we going to see unemployment rise when Turner is introduced? Possibly, but this is always difficult to tell as Governments tend to be somewhat economical with the truth when it comes to statistical information.

10 How will I, as a fee-charging financial adviser, advise my clients? When it comes to stakeholder, bought by a firm for its employees, my first duty is to the company, not to the individuals. That is one of the main reasons I will not do group personal pensions.

But I have several firms among my clients and I try to advise them in their best interests. Under stakeholder, they offered group death- in-service benefits and were therefore exempt from even considering stakeholder. Under the new provisions, I will certainly be looking to see if firms can cull their workforce by exactly the same percentage as the obligation to fund a pension. If that sounds callous, there are different ways of approaching this. The first one is to encourage self-employment wherever possible. With modern technology, this is becoming more and more feasible. Yes, one does have to be care- ful with the Revenue but it is still an achievable concept.

11 Remember that in 2012 we will still have two years to go when women will be able to retire at 60. The effect of the “grey revolution” is that more and more people who reach retirement age are choosing to work on or seek further employment. The lower-paid, who fall within the minimum wage provisions, are likely to be hit hardest. Why should an employer not exchange a young worker for a 60-year-old woman who does not have any NI liability and probably no liability to fund for a pension? The situation is similar for men over 65.

The current minimum wage works out at £202 for a 40-hour week. The lower earnings limit is £97.01. Therefore, the employer is subject to 6.6 per cent on the weekly wage plus another, say, 3 per cent on the pension. Employing a grey panther could save almost 10 per cent. Worth considering?

12 Publicity on the detail is also inept. There is to be a 3 per cent contribution from the employer, 2 per cent from the employee and 1 per cent from the Government as tax relief. Many will take this to mean that there is only 1 per cent tax relief, not the usual 22 per cent.

What of corporation tax relief for the employer contribution? If you translate these figures, it does work out more or less correctly but who will spot that? Then there are rumours of the withdrawal of tax-free cash. I quote John McEnroe: “You cannot be serious.”

13 Taking our minimum wage worker, his total gross contribution from his own and his employer’s contribution comes to less than £600 a year. What will that buy over 40 years? You can all do your own calculations. How much debt will he have to pay off before he can enjoy his retirement?

Of course, the whole thing could be a cunning New Labour plot. If it does go through, it will create such an almighty Horlicks for the next Conservative or LibDem Government to sort out that Labour will be in a good position to win the following election once again.

Yes, I agree that people should contribute but I also see inequities at the lower income levels where those who make efforts end up no better off than those who do not.

I am not only talking about the minimum income guarantee. What of the care home benefits, supplementary benefits and other means-tested benefits that are available? Of course, you must look after the most disadvantaged but those who make an effort must plainly see the rewards.

What answers would I propose? If I had all the answers, I would be sitting next to Lord Turner in ermine. All I can see is that the solutions proposed thus far do not seem to me to be robust or equitable.

Taking examples from Chile, New Zealand or Australia is a nonsense. We should be comparing ourselves with our developed European neighbours or perhaps with the US where, believe it or not, state pension provision is more generous than our own.

I do not expect universal agreement but it would be nice if some serious consideration were taken of some of the points.

Recommended

Mums the word…

Two big names in the protection industry recently discovered that they had more than an industry in common. Royal Livers Andy Milburn and RGAs Jason Hurley have only just twigged that their mothers are best friends and have been for years. Clearly their mothers have had far more interesting things to talk about than their […]

Pension plan trustees get free e-leaning deal

The Pensions Regulator has created a new module with a free e-learning programme and virtual trustee tool for pension scheme trustees. The trustee toolkit is made up of a series of modules, each containing a number of scenarios in which the user plays the part of a newcomer to a fictitious trustee board. The scenarios […]

Barings picks Syme for emerging role

Barings has appointed James Syme to head global emerging markets. Syme has spent nine years at SG Asset Management running its emerging markets desk.

Tax allowances and exemptions

Helen O’Hagan, Technical Manager at Prudential, looks into the planning strategies that can deliver considerable tax savings for your clients. Inheritance tax (IHT) Consider Margaret, featured on our Planning Matters family hub, who is a sprightly eighty year old with four children and several grandchildren. She’s recently been widowed and IHT planning is high on […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com