The problem is we’re not all eighteen.
I promise this is the last time I’ll write about the proposed National Pension Savings Scheme (NPSS) for a long while, but I keep getting egged-on by your e-mails so it’s not entirely my fault.
There’s a very big statement that the Pensions Commission makes about the suitability of pension savings being assured by the compulsory contributions that would become payable by employers if this national scheme ever gets the green light from the government guys. While accepting that pension saving can be unsuitable for people who end up subject to means-testing in retirement, the report argues that compulsory employer contributions can effectively make unsuitable savings suitable after all (on the basis that it’s the employer’s money that gets wasted and not the employee’s). That’s my way of saying it, of course, the report itself says it in a slightly different way typified in this little excerpt from Chapter 5, page 1601:
“a compulsory matching contribution [from employers] may be required to ensure that all members of the scheme [the NPSS] can achieve a reasonable return on investment, even if subject to some means-testing. It will thus make it safe to auto-enrol people without the expensive cost of regulated advice.”
Now, being my usual picky self that sentence just started my mind wandering over just what the word ‘safe’ means in that context and just how true it is that contributions from employers will ensure suitability of pension saving to all people in the workforce. To start with I thought about what the NPSS might mean to a 57 year-old woman with no other private pension savings and an incomplete record of National Insurance Contributions. If this lady were working in a department store or somewhere and had an annual income of £12,000 a year for a 35 hour week (not unusual by any means) then her earnings above the lower threshold that would count for NPSS contributions would be around the £7,000 mark.
The NPSS would require a 4% contribution from my hypothetical lady, 3% from her employer and 1% from the taxman; a total of 8% in all. 8% of £7,000 is £560. £560 a year for 8 years up to age 65 would give a pension fund of £4,480 plus (hopefully) some returns on the investment. But if that’s all the pension saving that she has to her name by the time she reaches age 65 then it would fall far below the limit that the tax people count as being ‘trivial’ and she would probably be advised to surrender it and get a cash lump sum if she could get anyone to advise her. The £5,000 or so pension pot would provide a pension at age 65 of about £3.872 a week before tax: hardly a fortune. And anyway, she will almost certainly lose it all to the means-test if there isn’t a radical overhaul of the way the state pension system works by then. That’s a big bet on her part. Indeed, she would be able to increase her weekly income by more, and in a more lasting way, by simply cancelling her daily newspaper.
That’s the problem with pension suitability, we’re not all aged 18 and we haven’t all got a whole working lifetime of saving ahead of us. The NPSS ‘one size fits all' approach really only makes sense in academic reports; in real life things aren’t that straightforward and it’s not ‘safe’ to assume that what’s good for some of us is therefore good for all of us.
To be fair to the Pensions Commission, their report does say much the same as this following excerpt from page 26 of the Executive Summary of the report shows3:
“The launch of the NPSS should also be treated as an opportunity to raise awareness, among both individuals and employers, of the significant advantages of saving via pension contributions, and of the fact that these advantages will, for most people, not be offset if our state system proposals are accepted” [My emboldening.]
The Commission’s report says that if the state pension system is changed fundamentally and means-testing is reduced then something like the NPSS might be a good idea. But everyone should bear in mind that the opposite is also true; if the NPSS is launched without fundamental (and costly) changes being made to the creaking state system of pensions and benefits at the same time, then the NPSS is likely to be a very bad idea.
14 February 2006
1 & 3 - The Second Report of the Pensions Commission, published 30 November 2005.
2. Scottish Life - Joint life annuity, payable monthly in advance for 5 years and then life thereafter during the lifetime of the first annuitant. The annuity payments increase in payment by 3% p.a. and payments will reduce by 50% on the death of the first annuitant.
This article is based on our current understanding of The Second Report of the Pensions Commission, published 30 November 2005.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.