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White heat

The Government’s White Paper proposals do not bode well for advisers

Last week’s White Paper on pension reform was billed by the Government as a “bold new pensions settlement”, providing infrastructure for the system for 40 years to come. With all the leaks preceding the report, it certainly feels as if we have been talking about nothing but Lord Turner’s proposals for pension reform.

Alongside the leaks last week, a letter from civil servants surfaced, urging Work and Pensions Secretary John Hutton to intervene with the FSA board meeting on scrapping RU64. In case you missed it, the FSA has decided to postpone action. Which? must be jumping for joy. However, it may mean that thousands of consumers postpone saving anything for the next six years.

The response to the reforms proposed in the White Paper have been luke-warm. The five key tests it is based upon – promoting personal responsibility, affordability, simplicity, sustainability and fairness – have broadly been met.

But a certain amount of glossing over has left much of the reforms still very much open to debate. For example, what are the implications for existing pension schemes? What will the Government do to tackle the unintended consequences such as the levelling down of existing contributions?

The Government has not made a firm decision as to how it will price NPSS or, as it is now calling it, the national personal accounts scheme. Although 0.3 per cent may be achievable in the long term, according to the report, calculations in the report focus on a 0.5 per cent annual management charge, in direct comparison with 1.5 per cent stakeholder charges.

ABI members, including Standard Life and Legal & General, have been campaigning for a twin-charge model, with a lower annual fund management charge at 0.2 per cent plus a 2 monthly admin charge. This model could deliver higher retirement funds for consumers overall. The White Paper does say it will be open to look at other scheme designs for charging so there could be an industry win on this subject.

NPSS, NPAS – whatever you want to call it – will have to be administered by someone. Will it be a stakeholder design administered by current industry bodies? Perhaps the Government will opt to create its own centralised body. If providers are to be the chief administrators of the NPAS, it has to be worth their time and money.

There is obvious disappointment as well about the move to a flat rate second state pension and the abolition of contracting out for defined-contribution schemes. More than just Tory spin, this does seem like a stealth tax on people on middle incomes, where there will be no reduction in National Insurance contributions to reflect the reduction in S2P, leaving earners paying the taxman for a benefit they will no longer receive.

The issue of dumbing down in the workplace is one of the most problematic. Reports are claiming that company pension costs will escalate by more than 8bn by 2014 in light of the pension reforms and the funding requirements of the Pensions Regulator.

Additionally, with the Royal Bank of Scotland already offering its staff an annual bonus of 15 per cent if they opt out of its final-salary pension scheme, it will not be surprising if others follow suit. Why not offer young workers a contribution towards a deposit on their first home to opt out, for example?

There was also relatively little in the White Paper on the current tax regime and contributions above the NPAS level. If tax relief reduces or disappears, which is not necessarily out of the question considering the Chancellor’s current mood, a certain element of the advice business may have to disappear along with it.

We are left with the original question that was posed last November when the Pensions Commission’s second report was released. Where do advisers fit into the equation? Well, according to the White Paper, they do not feature at all.

It says: “A new national personal accounts scheme will require both a high-level awareness-raising campaign and the provision of specific information and support.” This does not bode well for advisers. There must be space for advisers to engage in the debate. After all, some NAPS savers will become their clients in the future.


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