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Whose pension is it anyway?

In the second of two articles on the NPSS, Norwest Consultants principal Harry Katz offers some solutions to the problems he identified in his previous article.

I have always considered company pensions with ambivalence. Final-salary schemes run by public companies are in my view an affront against the shareholders.

It is indefensible that, due to current legislation, very often more is being pumped into the pension than is being paid in dividends to the owners.

How many firms are now benefit agencies instead of the suppliers of goods and services they are supposed to be? General Motors, Ford and British Airways are just a few well known examples.

When giving pension advice to companies, one has to ask who is the client – the scheme members or the firm? Invariably, the client is the firm.

In my view, many advisers have made hay by manipulating well intentioned employers into buying sub-standard plans for their employees. Group stakeholder is limited in its fund choices, has very sketchy paperwork and the annual reporting is far from clear.

With group personal pensions as well as group stakeholder, the members are left out to dry. I have files full of people who are members of group plans who have come to me because the adviser to the firm give them no advice at all and, bear in mind, these are often the big benefit consultants.

All the client gets is a piece of paper outlining the sparse choice of funds. The only reason they take the pension is because it is a “no-brainer” if the company contributes.

It would perhaps be more appropriate to show the firm how to avoid these group plans and, if it does want to provide pensions for its employees, it can do so on an ad hoc basis for those employees it feels warrant this perk and for whom it is prepared to spend a reasonable premium.

In these cases, single premiums are often preferable as they have no implicit obligation on the employer and can be used with flexibility in the remuneration review. Salary sacrifice also becomes a viable and flexible option as the member can, if so desired, contribute on a regular basis.

From the adviser’s point of view, he then has multiple clients because he is advising each employee separately, rather than one client which is the company. If employees move, the adviser can keep their clients rather than deal with them in an offhand and desultory way.

Of course, the life offices have a vested interest in promoting sub-standard group plans. The big premium business is disappearing as this now mainly goes into self-invested personal pensions in non-insured funds. Group personal plans are easy for the life offices as they have economies of scale and less administration than individual pension plans. Is it any wonder that life offices’ PR departments are busy promoting them?

The remuneration structure for the adviser can be best described as legalised mugging, so no surprise that they are heavily promoted. Is there any significance in the fact that some of those offices that promote group plans the heaviest often have the sparsest individual pension sales?

For those clients who do not merit a decent employer contribution or who are not that well off, it is perhaps better to advise both the firm and the potential client that having a pension may not be in their best interest anyway.

This brings us neatly back to the national pension savings scheme. It is easy for firms, as has already been pointed out by some commentators, to encourage employees to opt out.

First, bear in mind that although the employer will allegedly be contributing 3 per cent, the employee is contributing 4 per cent. So if the employee does not contribute at all and opts out, he is immediately going to be 4 per cent (gross) better off. If the employer decides to add the 3 per cent to his salary, he is going to be 7 per cent (gross) better off, which is a considerable difference for a low-paid employee, even taking tax and National Insurance into account. The likelihood of him being no worse off when he gets to retirement is very high indeed, under the current situation, so one must ask why bother?

From a firm’s perspective, the cost will no doubt end up as more than just 3 per cent. Administration will add to the cost and who is naive enough to imagine that the 3 per cent obligation could not be increased on a whim? Small firms have got quite enough to do without having to do this as well.

The ad hoc single-premium system as described above obviates the need for any legislative interference on the company, which can then use pensions and salary in the negotiation round quite freely, which is a great plus.

It seems to be always forgotten that pensions are in fact a part of the total remuneration package.

This whole NPSS idea is predicated yet again on increasing the ambit of the nanny state. It does not seem to have occurred to those in Government that firms are there to carry out their business, which is making widgets or providing services, not as a benefit agency for their employees.

Obviously, it is incumbent on them to treat employees well but surely it is better to pay a good living wage and let adults decide how they are going to dispose of their income?

The notion that workers are too stupid to make sensible decisions is insulting and condescending.

What would I suggest? It would be refreshing if Government ministers were more honest about the situation. “Seven million are not saving enough for their retirement,” says pensions minister James Purnell. That is because they still believe it is the job of the state to provide a living pension.

To remedy this situation, I have a few suggestions:

– No means-testing.

– Bring the tax structure of pension annuities in line with purchased life annuities or reduce the tax on annuity income.

– Provide a decent state pension without silly quirks. If it only requires a 30-year contribution record for the maximum state pension, then NI should stop at that point.

– Get rid of NI and fund pensions directly out of tax. That way there is no misconception about what has already been paid for.

– Something must be done about the inequity of the public sector pensions. Savings here could benefit all in state pensions. How about starting with MPs?

As a final thought, I wonder what the last honest Labour politician – Frank Field – would have done?

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