As this year begins the battle lines are already being drawn for the pension debate that will set the agenda for 2006 - the implementation or otherwise of the Turner Reportís recommendations. This will inevitably centre on the controversial proposal to create a National Pension Savings Scheme, with charges set at the low rate of just 0.3%, and the distortions that could make to the shape of the post A-Day pensions markets, not least the real concern that employers may make the NPSS the excuse for levelling down existing pension arrangements. I am very concerned about that, but even more concerned about the probable lack of consumer protection that would come with the NPSS and I think financial advisers need to be wary of this if the proposals go ahead.
The NPSS is effectively envisaged as being a low charging national scheme, possibly run by central government, which employees will be automatically enrolled into, but with the option of opting out. In this way membership would be voluntary as far as employees are concerned, but if an employee does join the scheme then it would be compulsory for their employer to contribute. The idea is that employees would be required to contribute 4% of their earnings above a minimum threshold, with this 4% contribution being matched by 3% from their employer and a further 1% from the taxman. But there is no recommendation that people should be advised on any aspects relating to joining the NPSS or at any point of their membership when their personal circumstances or the nature of the schemeís provisions should change. Indeed I have heard the NPSS described as being Ďan advice-free zoneí. This is one of its main features and presumably the only way it can work at such a seemingly low cost.
To me this is entirely wrong as it means that the NPSS will offer consumers little or no protection. To me, consumer protection is vital for five reasons:
1. The Commissionís wider proposals, if implemented, would not lead to the removal of means-tested support for pensioners in the future. Their most optimistic outcome is to reduce the likely spread of means-testing from the currently projected figure of 75% to something like 40% of pensioners. That being the case, suitability issues will remain a part of the pension system in the long term.
2. The range of investment choices proposed is inferior to those currently operating in the existing DC market. Under the NPSS model who will be responsible for the ongoing asset allocation decisions that individuals will need to take? Who will regulate this for the forty or fifty year terms of this Ďcontractí?
3. For those currently without pension savings the proposal is that the voluntary contribution would trigger a compulsory matching contribution although in practice this would effectively be a 7% contribution from the employee as employers do not have access to a separate source of money outside of the economy. In my opinion, the same outcome in terms of take home pay for the employee could be achieved through a salary sacrifice of much less than 7% when working tax credits and child tax credits are taken into account. Alternatively a 7% salary sacrifice into a stakeholder pension scheme would provide higher pensions than the NPSS model. Either way, there are better (and cheaper) ways for employers and employees to rearrange salaries and benefits in the modern DC pension system than the NPSS proposes.
4. With a system based on voluntarism for employees that triggers compulsion on employers, what protection will be put in place for employees? An employer may find it cheaper to offer an employee a 2% pay increase, for example, if they donít join the NPSS. In effect an advised opt-out. Who will be responsible for protecting employees against unscrupulous practices such as this?
5. The Pensions Commission is not recommending any major changes to the system of pension tax relief over the short term, but does recommend that the option of creating a scheme specific tax regime for the NPSS, with tax relief expressed as a government matching contribution of equal percentage value to all members, should be explored further. A flat rate of tax at 22% would mean that as people in the NPSS become higher rate taxpayers they should be advised to leave the scheme and join a more suitable pension arrangement. Who will be responsible for monitoring such things on an ongoing basis? If the flat rate is ever manipulated by future governments to a rate below 22%, who would be responsible for advising all members to move to other more suitable pension arrangements outside the NPSS?
I do hope that we donít eventually end up with two pension systems; one where consumer protection is of paramount importance, and another where it isnít important at all.
First published in Retirement Planner, January 2006