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NPSS tug of war begins

NPSS tug of war begins

Category: Annuities

Updated: 31/10/2008
First Published: 27/06/2006

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Following the publication of the Turner Report at the end of November last year, there was the inevitable outpouring of opinion, conjecture and criticism regarding each and every aspect of the Pension Commission's recommendations. The main focus of attention in the immediate aftermath was the raising of the State Pension age, but it is now the turn of the other key proposal of reform, the introduction of a National Pension Savings Scheme (NPSS), to take the spotlight. The Pension Reform Minister, Stephen Timms, invited key members of the financial services industry to give their opinions on the NPSS and present viable alternatives and, it is fair to say, they have not been shy in coming forward.

Lord Turner's blueprint aimed to encourage private pension saving by automatically enrolling employees without a workplace pension into the NPSS, and ensuring an employee contribution of 4% would be matched by an employer contribution of 3% and 1% tax relief. Workers would be able to opt out of the scheme, but if they chose to remain, the employer would be compelled to contribute. To be administered by the Government, it was also proposed the annual management charge (AMC) should be able to be kept under 0.3%, far below the current maximum stakeholder charge of 1.5%.

Partnership Pensions

It is perhaps the issue of cost that has caused most contention. According to the Association of British Insurers (ABI), the Pensions Commission has underestimated the true costs of running the NPSS by at least 50%, claiming a figure of 0.7% is more realistic, and is one that would still represent a cut in private sector costing by over a half. The ABI argue that their Partnership Pensions model would certainly be cheaper than the NPSS for at least the first ten years, as set up costs and teething troubles faced by the Government would not be applicable to the private sector with its established systems and know how.

Perhaps unsurprisingly, criticism of the ABI was quick to follow, with parallels being drawn with the insurance industry's persistent campaigning for an increase in the AMC cap when stakeholder pensions were introduced. A survey by Which? has also reported that just 11% of the public feel their savings would be safest within the financial services industry, compared with 40% displaying greater trust with an independent body. In response the ABI has suggested the introduction of a new economic regulator, the Retirement Income Commission, to monitor costs, promote consumer awareness and also ensure existing savings and good pension provision is not affected. Despite the difference of opinion over costings, the ABI agrees with Lord Turner over the notions of auto-enrolment and matching employer contributions.

Super Trusts

The criticism of the NPSS offering probably the best headline opportunity has come from the Chief Executive of The National Association of Pension Funds (NAPF), Christine Farnish, who described the possible reforms as being "like a throwback to the Stalinist era, setting up a single monolithic structure." NAPF's alternative proposition involves the establishment of up to 20 Super Trusts, with employers having to designate one of the trusts in which to enrol their employees automatically, unless they can provide a superior alternative. The not-for-profit, large-scale defined contribution schemes would benefit from economies of scale that would keep costs low (a charge of around 0.4% is estimated) and the investments would be managed collectively by appointed trustees, thus eradicating the need for inexpert savers to make complicated investment choices. A requirement that each Super Trust reports annually to the Pensions Regulator on its costs and charges, investment strategy and performance, administration standards, and quality of member communications would promote competition between trusts and enable employers to opt for the trust they deem most appropriate.

Further explaining the benefits of NAPF's proposition, Farnish comments: "Having a number of Super Trusts avoids the dangers of having a single, all-powerful institution that is close to Government, and the risk of setting up a massive new infrastructure to collect and allocate savings. Ordinary people would know their money was being looked after by someone they could trust, with the expertise to manage funds on their behalf. And there would also be someone there to help them plan their retirement and buy an annuity." A subsequent survey from NAPF revealed 61% of respondents would prefer a Super Trust like organisation to manage their pension scheme, compared with 20% favouring the Government, and 17% the insurance industry.

Perfectly workable

Support for the NPSS as proposed by the Turner Report has come from the Investment Management Association (IMA), with Chief Executive Richard Saunders calling the scheme "perfectly workable", so long as it is properly implemented and governed. Similar to the NAPF proposal, the IMA recommends an independent and accountable board acts as trustee in order to enhance consumer confidence and trust. Unlike NAPF, however, the IMA believes a single centrally managed vehicle would be best, with the simplicity of the scheme increasing participation and being cheapest to manage. Key to the success of the proposal will be the management of the 'default' fund arrangement, as this is the fund the majority of people will opt for, or otherwise find themselves placed into.

An organisation not formally invited by Stephen Timms for their opinion but which has aired strong views nonetheless is the Confederation of British Industry (CBI). In particular, the CBI disagrees with employers being compelled to contribute to employee pension schemes, citing fears of a possible rise in labour costs that would affect employment levels and put some companies out of business. Whilst it agrees that automatic enrolment is acceptable, the CBI proposals call for both the employee and the employer to have an equal right to opt out if they so wish. Deputy Director General of the CBI, John Cridland, wants to "cajole employers, not compel them, into voluntarily contributing" by requiring those companies which choose to opt out to explain their decision to employees.

Having heard all the proposals and absorbed all the opinions, the Government now has the task of producing a final model that will ultimately result in more people saving for their future, with a White Paper expected to be published in the spring. Whatever form the system eventually takes, there is little doubt that the recent discussions and debate have brought the issue of retirement saving to the forefront of people's minds.

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