21st Century Pensions vs 20th Century Pensions
I’ve just been reading a really interesting report from the Pensions Policy Institute (the PPI) which, as you may recall, is my favourite pension think-tank. They’ve done a nice piece of research work comparing the proposed National Pensions Savings Scheme (NPSS) with the proposals for the so-called KiwiSaver pension reforms from New Zealand. The KiwiSaver came up quite a lot during what passed for the public debate we had around the time of the Pensions Commission’s report into UK pension reform last year, indeed some people dubbed the Turner reforms a ‘BritSaver’ product. But this is the first time I’ve understood just how good the New Zealand scheme will be and how poor our reforms might look in comparison. I think you’ll be interested too.
New Zealand is the only other country in the world planning a national scheme that will be built around this concept of ‘auto-enrolment’. The idea is that people will be automatically included in the UK NPSS scheme (if it ever gets off the ground), but will have the option of opting out if they want to; sort of compulsion for those who want it if you like. The same idea is proposed for the KiwiSaver.
Now it seems to me that the trouble with voluntary compulsion (if I can call it that) is that the thing you’re being auto-enrolled into needs to be appealing enough in the first place for you to want to stay in it. If it’s not, then the inertia effect that auto-enrolment is supposed to bring to the party can be quite a dangerous thing that could end up catching out a lot of people who’ll end up with unsuitable pension products because they didn’t properly understand what was going on. If all the pension savings amount to for people caught in such a way is to be nothing more than privatised welfare then ringfencing the NPSS in an ‘advice-free zone’ doesn’t seem to me to be the right thing to do. I know that many of you who regularly read the BeeLines agree with that as we had such a strong response to our recent poll on the subject of auto-enrolment in our heavily means-tested environment.
The big difference between the UK and New Zealand is that in New Zealand people become entitled to a very high universal state pension and only 5% of the retired population are subjected to means-testing for supplementary income in retirement. In the UK the opposite is the case; we have a very low Basic State Pension which does not even come with universal entitlement and we are currently on course for 75% of future pensioners becoming eligible for means-tested handouts in the form of the Pensions Credit. The Pensions Commission recommends that means-testing should be reduced in future if we are to go ahead with their NPSS proposals, but even after their suggested improvements eligibility for Pension Credit would remain at 45% of all pensioners. So we’re not like New Zealand at all.
On top of that, the KiwiSaver has some appealing features that are aimed at giving people real control over their long-term savings when compared to our nanny-state approach of us having to put up with other people knowing what’s best for us and telling us what to do with our own savings. A good example of this is that annuitisation (the buying of an income stream in old age) is not compulsory with the KiwiSaver. The KiwiSaver can also be used after three years to fund a deposit on a new home, something that will clearly be of use to young people at the start of their working lives.
I’ve copied and pasted here a table from the PPI press release comparing the NPSS proposals with the KiwiSaver proposals so you can see for yourself how enlightened pension savings are developing elsewhere in the world at the beginning of the 21st Century. It seems to me that other countries are waking up to the fact that long-term pension savings have to be of genuine use to people throughout their lives and not just at the end of their lives if they are really ever going to get the kind of public support they need to become part of our culture. What the politicians in New Zealand are suggesting looks a better model for 21st Century pensions to me than the rehashed early 20th Century state run collective ideas we’ve got on the table. To me it seems the difference is between pensions that people control vs pensions that control people. I know which type appeals most to me.
Also, here’s a link to the full PPI report for those of you who’d like to read the whole thing.
19 April 2006
Pensions Policy Institute - NPSS policy and design choices.
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