January 2006

The Royal London Group is concerned that the recent proposals to introduce a National Pension Savings Scheme (NPSS) could lead to social exclusion at one extreme and people making unsuitable financial decisions at the other.  We believe that new pension options for those currently not saving for the future should not be implemented without proper consumer protection being put in place at the same time.

Consumer protection is important for those saving in long-term financial products.

The proposed NPSS structure would lead to compulsory pension contributions from any employer whose employees (or employee) choose to remain opted in to the NPSS.  There is a clear incentive for employers to persuade employees to opt-out of NPSS membership.  Consumers will need to be protected from such unscrupulous actions that may be taken by employers.  If such protection is not made available then those employees opting-out of accepting their employers’ compulsory pension contributions would find themselves unable to contribute to other long-term savings products available outside of the NPSS.

It is unlikely that the Financial Services regulator would allow people who become ‘advised opt-outs’ to be advised to save in other regulated long-term products.

While means-tested benefits remain available to people of pensionable age it is not possible to ensure the suitability of pension saving for millions of people in the current UK workforce.  While it is true that pensions can be distributed more cheaply if suitability issues are ignored it is highly questionable whether this should become Government policy.  The worst outcome would be that two pension savings regimes would emerge; the existing regime where suitability and consumer protection are paramount, and the NPSS where suitability and consumer protection do not matter at all.

If suitability and other consumer protection issues are ignored, then financial products can be distributed cheaply.  But that would be bad public policy in our opinion.

If two such regimes were allowed to stand in an attempt to spread saving to those currently without meaningful pension savings it seems unlikely that existing personal pension savings for basic rate taxpayers could continue outside of the NPSS.  The NPSS as it is envisaged would simply replace existing pension savings for basic rate taxpayers and place them into an environment where they would be obliged to forego the proper consumer protections they currently benefit from in products regulated by the Financial Services Authority.