The National Pensions Savings Scheme proposed by the Pensions Commission has the potential to make it impossible for millions of people in the UK workforce to ever be able to make meaningful long-term savings plans in existing products such as pensions and ISAs. This will be the case irrespective of whether or not the take-up for the new scheme, if it is ever introduced, is high enough for the government to claim it as being successful.
The proposed NPSS would lead to compulsory pension contributions from any employer whose employees (or employee) choose to remain opted in to the scheme. The idea is that all employees who do not have existing pension contributions from their employer at a sufficient level would be automatically enrolled in the national scheme at some point in the future (probably in 2010). This is likely to be around 12m people who by and large will be working for smaller employers. People staying in the scheme, and thereby accepting the 4% of earnings cost of doing so, would trigger off a compulsory 3% of earnings contribution by their employer and a 1% of earnings top-up by the taxman. The NPSS would look like a 4% money purchase contribution by employees matched by a 4% compulsory additional contribution of 4% made jointly by the employer and Her Majesty’s Revenue & Customs.
The NPSS, with this curious idea of compulsion only applying to people who choose it, is envisaged as being structured like existing occupational money purchase schemes. Because it would be treated as an occupational scheme it would not therefore be regulated by the Financial Services Authority. That would clearly minimise the costs of distribution and the need for anyone involved to check on the suitability of pension saving for the individuals swept into the scheme. Because of the assumed suitability of membership and the lack of regulation involved the costs could be kept low and are proposed to be at a level no higher than an annual management charge of 0.3% (one fifth of the initial cost of running low-cost stakeholder pensions).
The authors of the report claim that such a bold move (of introducing the NPSS alongside existing pension schemes) would drive down the costs of pension provision and spread pension coverage at the same time. Many agree with that assessment and the government is currently working to produce a white paper to be published in May 2006 to put the NPSS (with a start date of 2010) onto the statute books later in the year. As it is to be a white paper rather than a green paper it seems unlikely that there will be any consultation on the topic. It looks likely that the NPSS will exist one day.
For the 10m to 12m people with no pension savings that the Pension Commission are setting out to help, the advent of the NPSS would give them an immediate issue to come to terms with; would they want to commit 4% of their earnings (after tax) to the NPSS, or would they prefer to opt out of the scheme and leave their take-home pay as it is? In the real world of the average employer and employee relationship in the UK in the 21st Century the ways people will divide up the day after the NPSS comes into being will be determined by 12m people probably making decisions that suit both them and their employers. The Pensions Commission thinks that the vast majority of people automatically enrolled in the NPSS will stay in and pay the 4% required. I don’t think real life is like that. But it doesn’t matter who is right and who is wrong. 12m people will make their individual decisions to leave the NPSS or to stay in it. Whatever decision they make one thing is for sure; they will never again be likely to save in other long-term savings products such as stakeholder pensions or ISAs.
Those who decide to opt out of the NPSS would effectively become ‘advised opt-outs’. They would be giving up the compulsory pension contribution of their employer as they would have been automatically enrolled in the NPSS and could only get out again by opting out. This would make them very much like the employees who did not join, or left, their occupational pension schemes in the late 1980s. Companies and advisers who subsequently sold long-term savings products such as personal pensions to such ‘opt-outs’ were wrong to do so. The advent of the NPSS will precipitate 10m personal decisions that could leave millions of people in the UK workforce as ‘opt-outs’; people who financial services companies and advisers wouldn’t touch with a barge pole.
So it doesn’t matter in the end what decision basic rate taxpayers make with regard to NPSS membership as far as the financial services industry and advisers will be concerned; either way they will be off-limits to us.
So if the NPSS is launched, it will all come down to one big bet from the government. They will be gambling that it is worth throwing away the voluntary, advised long-term savings markets in the hope that 80% of the workforce will jump on the NPSS bandwagon. That’d be a very big bet!
First published in Retirement Planner, February 2006