The Second Report of the Pensions Commission
Well the so-called Turner Report eventually saw the light of day this morning.† How was it for you?† Itíll obviously cause a minor storm in our Westminster tea-cup for a little while, but whether it will prove to be the catalyst for change that our pension system is crying out for is something we wonít know for years and years I guess.† Good ideas are one thing, good legislation is quite another.
Iím going to summarise the main points here in case thatís something that youíd find useful, but Iíve also added at the end of this BeeLine a link to the 40-page ĎExecutive Summaryí and another to the whole report in case youíd like to get a copy of the full technicolor version.
Notwithstanding the leaks weíve had over the last week or two there are still some surprising little snippets in the report that Iím sure youíll be interested in, not least the idea that people contracted out of S2P with personal pensions could be forced to contract back in whereas those contracted-out in final-salary schemes wonít be, in the short-term.† More of that later, first a blow-by-blow account of the main recommendations:
- The State Pension should be made flat-rate after a period of transition.
- The whole system should be made as non-means-tested as possible, again over time.
- The State Second Pension (S2P) should evolve to become a flat-rate pension over time through freezing the Upper Earnings Limit for S2P accruals.
- The Basic State Pension (BSP) should be increased in line with earnings over the long term, starting in 2010 or 2011.
- This could be made affordable in the longer term by raising the State Pension Age gradually to 66 by 2030, 67 by 2040 and 68 by 2050.
- The future accrual of the Basic State Pension should be based on a universal (residency) basis.
- A universal BSP should be introduced for people over the age of 75 in the meantime as the transition from the current contributory basis washes through the system.
- A National Pension Savings Scheme should be created.
- All employees should be automatically enrolled into funded pension saving, with the option of opting-out, either in existing employer-sponsored schemes or in the National Pension Savings Scheme.
- Minimum contributions should be set at 8% of†pay over £4,895 pa.
- The make-up of the 8% contribution being 4% out of an individualís post-tax earnings, 1% paid out by tax-relief and 3% compulsory matching employer contribution.
- Contributions to be collected by the PAYE system or a new Pension Payment System.
- Contributions to be held in individual accounts and invested in a wide range of funds at the individualís instructions, with a default fund for ditherers.
- Additional voluntary contributions allowed above the minimum default level by both employers and employees and the self-employed will even be allowed to chip in on a voluntary basis too if they like.
- The annual management charge for running the scheme will be 0.3% or below.
- Beyond 2020 an increase in public expenditure will be required to pay for the recommended reforms.
- That will need to be accompanied by government taking measures to facilitate later working.
- The age-discrimination default retirement age of 65 (that has just been announced by government) should be dropped.† The recommendation is there should be no age limit by which employers can require their employees to retire.
- The latest age at which people are required to buy an annuity with their pension savings (currently 75) should be increased to reflect increases in general levels of longevity.
- People contracted-out of the State Second Pension in a personal pension or an occupational money-purchase scheme should be forced to contract back in.
- People contracted-out of the State Second Pension in an occupational final-salary scheme should not be forced to contract back in in†the foreseeable future, but it is proposed that this option is abolished by 2030.
- No changes are recommended to the way tax-relief works for pensions except that a new type of tax-relief (22% for all) will need to be introduced to support the way the new National Pension Savings Scheme would work.
- The self-employed should be given the option of joining the State Second Pension (S2P) on a voluntary basis.
Well, thatís the most of it and I think youíll agree itís a bit of a longish Christmas list which Santaís probably not going to be able to meet in full.† Thatís the problem really, proper reform in the way the Pensions Commission envisages it can only happen (albeit over a very long time-frame) if all of their recommendations are bought into by government.† As I said at the beginning, good ideas are one thing, but good joined-up legislation is what weíll require and, letís be honest, thatís not something weíve got a particularly good track record for is it?
This report is all about inter-generational transfers of assets really, but the problem that we face is that one of the generations involved in the equation is the Baby-Boomer one.† There are no easy answers at the macro level because of that.† The political choices will be tough and prone to all kinds of fudges and shifts.
On one or two of the recommendations made today, though, I think we should be very careful.† I am particularly worried about this idea of a new National Pension Saving Scheme.† Iíve read and re-read the document and I canít find any mention anywhere about the need for people joining it to be given advice on the suitability or otherwise of pension saving.† I find that unbelievable.
What the report says early on is that the present voluntary system has failed and is in serious and irreversible decline.† I disagree with that most strongly!† The present voluntary system has gone as far as it can in the crazy means-tested environment that we have had imposed on us.† Those of us involved in distributing regulated pension investments to people are quite properly bound to ensure the suitability of such investments at the time they are recommended to individuals.† This new National Pension Savings Scheme, even though it will be made up of what will look like individual accounts, seems to me to be based more on the occupational pension scheme model where no such care has to be taken at the point of distribution.† That will obviously make things easier and cheaper to run, but isnít there a real risk that unsuitable pension investments could be foisted on millions of people in the process?† I really do hope it never comes to that.
Also, and while Iím at it, I suppose I should also say that Iím more than a bit confused by the recommendation that people and their employers should be compelled to pay into either an existing employer-sponsored scheme or the new National Pensions Savings Scheme.† Will the 300,000* empty Stakeholder shell schemes count as†Ďexistingí schemes?† I canít see why not, but if they are then, by definition, the only employees going into the National Pension Savings Scheme will be those working for companies with fewer than four Ďrelevantí employees.† It would be a bit of a blow to a 40% taxpayer working for a very small company to find theyíre compelled to save in a pension scheme that only gives 22% tax-relief wouldnít it?† If employees of the smallest businesses of all are the only ones likely to be the members of this new scheme wouldnít it just be easier to extend the requirement to run a Stakeholder pension scheme to all employers irrespective of the number of employees they employ?† Itíd be a lot less palaver than setting up a whole new tax system that only gives†basic rate†tax relief. Or am I just being sensible again?
Iím going to end now and you can read the whole thing for yourself if you like by following the links at the end here.† But if I were asked to sum up the Commissionís big idea to get us all saving I guess Iíd say that what theyíve come up with is a notion that pensions sold without advice are cheaper to distribute and run.† I donít think anyone would disagree with that, but it hasnít got much to do with the real world we live in has it?
30 November 2005
* ABI - Stakeholder Pensions - Time For Change, August 2003
Any research and analysis included has been provided by us for our own purposes and the results of it are being made available only incidentally.
This document is based on Scottish Life's current understanding of the Pensions Commission Second Report published on 30 November 2005.