Ahead of the publication of the DWP's Pensions White Paper, IFAonline brought together six intermediaries to share their thoughts with James Purnell, Minister for Pensions Reform, about current proposals for personal accounts.
Compulsion versus auto-enrolment
Nick Bamford, managing director of Informed Choice:
I would like to discuss the government’s decision to opt for automatic enrolment over compulsion. Why not adopt compulsion? What did the government find unacceptable about compelling people to save beyond a State pension?
James Purnell, Minister for Pension Reform:
We do compel people to save through the State pension as people do have to pay tax and they do have to have a State pension. So the question in relation to making provision beyond that was should it be compulsory?
We thought that there were some [groups of people] who at particular points in their lives would have legitimate reasons for not wanting to save. People paying off very high burdens of credit card debt, for example, might be better advised to pay that off first before starting to save. People who are going to be persistently on low incomes are actually going to get quite a good replacement rate from the State anyhow and should use it for consumption today rather than to top up their pension in situations where they will probably be getting as much from the State pension as if they were to pay into a personal account while working.
The fear is many people will simply choose to opt out of personal accounts.
We have already seen some research suggesting half of the people this is targeted at will simply vote with their feet and will be like a massive revolving door – they will be automatically enrolled and as soon as they see the impact upon their net earnings they will vote to come out of it. I’m uncomfortable with an automatic enrolment system which has the absence of compulsion. What will encourage them to stay in there, James?
The reason the Turner Commission recommended this is they looked at automatic enrolment in private pension schemes in both here and in the US and it does seem to be quite successful in terms of raising people’s participation.
There are, broadly speaking, three groups of people:
- those who know they want to save and do save,
- people who know they want to save and don’t get around to it, and
- people who don’t want to save.
And automatic enrolment is pretty good at increasing the participation rate. Our estimate is 50-70% of people will stay in. If they decided not to stay in the first time we would then re-enrol them on a regular basis so even if they decided for good reasons – such as saving for a deposit now and therefore don’t want to save for this period - we would then come back and enrol them repeatedly throughout their career.
Employer incentives to save
Michael Inkley, director at Sanderson Law Pensions Management:
The question then is whether automatic enrolment over compulsion gives the employer an enormous incentive to persuade the employee not to save.
It’s an interesting issue because when we surveyed employers – from small and big companies – two-thirds thought a 3% contribution was about right, or too low.
Obviously there will be some employers out there who don’t think they should play a role in this process but when I talk to employers I find a lot of them provide company pension schemes already. And there is another significant group who would like to do so but don’t see a good vehicle for doing it at the moment.
We think most employers understand if we don’t deal with the pensions problem, they are going to be part of the people paying the price in the future because taxes would come under pressure when we have people retiring on levels of income which are totally insufficient.
Cutting financial advice out of personal accounts
You mentioned the ability to opt out could be suitable for those with high levels of debt and low incomes but both of those groups may have situations where there is clearly the need for advice. Yet government proposals appear to cut advice out of it.
It depends on what kind of advice, I guess. We think we will be able to give people generic advice as the Turner Commission thought that was possible, rather than advice where someone sits down and goes through their mortgage, pay, future pay prospects’ and everything you would need to do in independent financial advice.
The reason that is so important is that we are talking about people on income of £5,000 to £30,000 a year and, at the moment, it appears pretty hard to sell them a pension product for less than 1.5% in charges.
Turner thought we could get down to 0.3% and even if we got down to 0.5% that makes the difference of a quarter in people’s pensions in the long-run and I think that’s important. Clearly, the test to that will be the advice and how that works if people do think it is possible to do that through generic advice.
Roger Sanders, deputy chairman of Helm Godfrey:
The DWP has in the past run its very successful Informed Choices project which showed the benefits of explaining pensions to employees. We all acknowledge there is an incredible amount to be done with younger people and I think one of the reasons is people are not being shown the benefits of a pension in the workplace.
Even if you offer a decent scheme as an employer, 25% of those who are offered the chance don’t bother to join without an additional component of advice whether it be generic or focused and in terms of linking the pension provision with what they have already.
So what is your view on how an employer could legitimately pay for advice to give their workforce on the merits of the new personal accounts and other related pension issues?
I believe there should be the ability - with employer and employee consent – to factor the cost of that advice into the additional cost borne by those accounts so. If we end up with a base fund management of 35 basis points or 40 basis points, there should be a facility for an additional charge to pay for the advice with the consent of all concerned in that particular place of work.
That’s obviously an interesting idea and when we publish our document there will be consultation questions in there and the ability to make lots of representations.
The White Paper we produced in May was very white on State reform and greener on personal accounts. This White Paper will be white on personal accounts and green on some of the subsequent issues like advice so the door is very much open on that.
The discussion is also happening in a wider context in our work with the Treasury and the FSA on their financial capability work because one thing that seems to be said by everybody is you don’t want to be talking to people just about pensions, you want to be talking to them about money.
We need to be thinking about how overall - as government, as industry, as regulators - we make it possible to have conversations with people about their money, of which pensions would be a part and how generic advice and informed choice will work in the context of that is really an important question.
But we needed to work out first which model we were going for before deciding how to do that because different models would require different types of information and advice, they’d have different kinds of marketing etc.
I think it is also worth saying automatic enrolment puts that in a very different context so in the current world the whole drive is to ‘persuade, persuade, persuade’ whereas now it’s all going to be ‘explain, inform, help and persuade’ so there’s a different context.
Ian Smith, managing director of Central Financial Planning:
On the issue of generic advice and what you are looking at, one of the flaws spotted in the system is means-tested people on low earnings will get auto-enrolled [at an early stage] but effectively get nothing for their money. For those who might fall into that category, will generic advice be an opt-out? Does part of the matrix of advice actually say certain categories of people should be opting-out generally because their circumstances don’t fit personal accounts?
We don’t think that’s true, and we’ll be publishing some pretty in-depth research about means-testing. I can’t prejudge the paper entirely because we are still working on it and we will be publishing it very shortly. But people on persistent low income won’t be automatically enrolled so it’s only people above £5,500 or so and those are the people I was referring to at the beginning who are better off relying on State benefits.
One of the things which worries me is the investment element of personal accounts because people do not like it when they are given no choices, but if you give people choice there is this danger they’ll make the wrong choice. Child Trust Funds had a massive move towards putting money in cash, and most advisers believe holding a CTF in cash is not a great idea. How are you going to try and tackle that?
That’s a very good point. One of the key things we’ve been looking at in the research leading up to the White Paper is the balance between choice and simplicity.
Most consumers say they don’t want any choice, they want it simple. But a significant minority say they do want choice so we have to try and design a system which allows both those different groups to feel comfortable in personal accounts. A key part of this, whichever model you go down, is the default fund and ‘lifecycling’ so key decisions are being managed on their behalf.
Tom McPhail, head of pensions research at Hargreaves Lansdown:
The question we are kicking around is one of ambiguity and whether there is a sufficiently strong message that will go out to potential savers and through the pensions industry that for enough of the people, enough of the time, it is sufficiently in their interests for them to join the scheme.
We are in this realm of ambiguity, and you’re going to get opt-outs and uncertainty and a diluted message as a result. You need to have a very strong, simple message which says for most people, most of the time, personal accounts are going to be a good thing.
More importantly, the PPI has published research which suggests significant differences between their conclusions on the levels of means-testing and your own. They have said if you just got rid of contracting-out you could finance the Basic State Pension for everybody now, they are offering alternative models so whichever direction you take these reforms, are you satisfied that what you produce with this White Paper will resolve this ambiguity question?
There are certain aspects of the White Paper which have almost universal support – such as raising the earnings link and increasing the State retirement age. But when you look at the means-testing issue the only significant organisation supporting you is the CBI as everyone else was either opposed to it or refused to comment on it so you can control people’s responses in terms of what you put in front of them.
We do think most people would be better off under the new system as we think the returns in personal accounts will be very attractive to people and we’ve published an analysis on pensions credit recently which explains the difference between us and PPI. I think people broadly accept the PPI projection of people two-thirds on Pension Credit is not really a projection of what would happen under the White Paper. In effect, that’s a projection of what happens if private saving in the UK collapses and personal accounts don’t work.
But we’ve done sensitivity analysis and for a whole range of factors that projection of a third to a quarter of people on means-testing we think is pretty robust.
Consulting the ordinary man on the street about pensions, in light of stakeholder
John Donaldson, IFA partner at Positive Solutions:
I really come from a background where I spend a lot of time talking to very normal people – Tom and Mary who own a house and earn £30,000 a year – and we are having conversations every day about money. We’re not talking about raising pensions or life insurance, we’re talking about money and their future and we talk to them about the ambiguities they have in their future. The reasons why they take advice is they want certainty and they want somebody they trust to say this is the right way or the wrong way to do it or this is how you could do it better.
We saw stakeholder launched and, to be frank, I’m sure you’ve figures to prove it was, but from our point of view it hasn’t been a great success.
The new personal accounts seem to be launched on the assumption if they’re very cheap and you take advice out of equation you will then create some kind of success because you’ve got a cheap product. How many ordinary people have you consulted on £25,000 to £30,000 a year and asked: if we reduce the cost of pensions would you buy one?
We did actually consult thousands of people and did some significant consumer research and held focus groups as part of the National Pensions Debate which involved 6,000 (or 10,000) people around the country. It was conducted with people it in a deliberative way so was not just someone with a clipboard asking questions but we had people sitting around tables, trading off all of these options and then we got them all to vote at the end of the day.
And they liked the idea of automatic enrolment. That was the key thing that came out of discussions. They thought it would make it simpler for them.
I’m wary of the word certainty because I don’t think any of you can offer certainty and I don’t think we should pretend that we do. What we can do is offer people simplicity and a good expectation of a return in retirement which justifies them having the pension. Company pension schemes work very well for this market as well as for higher earners and the personal accounts scheme is intended to bring benefits of company pension schemes to people who are not offered them at the moment, such low charges which you can get through bulk buying, but also a simpler system and the greater critical mass and security you get from being in a big scheme.
And stakeholder was very effective in reducing charges. Whatever debate you want to have about the pros and cons of them and how many people took them up, the Turner Commission found the stakeholder charge cap was the most effective thing that we and previous governments had done in terms of dealing with pensions charges.
Getting the self-employed to save
There are some elements of personal accounts I strongly disagree with it this is the right move for the self-employed as we are seeing a significant growth in what can best be described as low income self-employed. There are potentially more people qualifying for a full State pension as I see it, based on the huge reduction of the National Insurance contributions required to get the full pension. But there could be relatively little contribution coming back into the system.
Where is the real incentive to save for the self-employed?
In our last White Paper we did explore quite a large range of avenues to see what could be done when there is no employer contribution coming in. You have two groups of people in this category. For the low-income self-employed, when there is the absence of an employer contribution it’s hard to see what you do to give them some very good incentive. The high-earners are likely to sell their companies on retirement and are making provision either through a pension or through other ways, so if people come up with ways of addressing this issue we’re very interested.
Why not perhaps offer them a higher tax break as an incentive, some form of higher tax relief or form of incentive?
If it’s true in the next 10 to 20 years the number of people becoming self-employed could be a growing proportion of the population, it could also changes in the way the labour markets are working. I met someone recently who is setting up a very low-level service company and he’d hoped to sell it but he was beginning to realise he was never going to be able to sell it, and his pension was his company so he wasn’t going to be able to retire. This is why we need to try and persuade people to save.
You can read more of the thoughts and comments from our roundtable of six financial advisers with James Purnell MP, with specific focus on the key priorities intermediaries believe the government should tackle.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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