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
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.