The Federation of Small Businesses (FSB) has produced a model for funded second tier pension that it...
The Federation of Small Businesses (FSB) has produced a model for funded second tier pension that it believes would eliminate the need for advice.
The group has issued a paper on why it thinks stakeholder pensions will be ineffective and its plans for an alternative based on the with-profits investment model.
The model aims to provide immediate pension membership to all workers earning above the lower earnings limit and will not create marketing or distribution cost burdens.
The group is proposing that by taking part of the current National Insurance contributions and feeding them into a co-insured fund, marketing, distribution and regulatory costs would be minimised and the need for advice would be eliminated. For the purposes of the model the group has based it on a with-profits type fund shared between 13 product providers.
Terence O'Halloran, national pension spokesman for the FSB, said: "By using the with-profits principle, the profitability of the participating co-insurers of the fund would be distributed to citizens as opposed to feeding profits to what will inevitably be foreign based fund management houses."
Its model calculates that 5.8% of a worker's earnings can be separated from the 20.5% which is deducted for National Insurance purposes, and then paid into the co-operative fund. Because the structure is with-profits based, the bonuses could even be skewed as to provide lower earners with additional benefits as compared to higher earners within the same fund, O'Halloran said. Due to the scale of the co-operative aspect of the fund, charges could be kept as low as 0.3% and there would be no need for choosing between providers or funds. Contracting out would not be a consideration, therefore advice would not be needed, he said
O'Halloran added: "If our model had been applied to Serps rom 1978 through to 2000, using a 75% to 25% equity to gilt split, then after all benefits had been paid there would have been a surplus of £335bn.
Using our second tier pension (STP) model, calculating on rising benefits and Serps liabilities there would still be a surplus of £125bn.
"An average person starting an STP in 2001 and retiring in 2024 would receive around £162 a week in state benefits and £25.66 on top of that through the STP."
The advantages of the model means it will reduce the administration employers will have to deal with as it would eliminate the need to consider contracting out, according to O'Halloran.
He said: "The biggest concern of our members is they do not want to deal with more administration and that is what stakeholder pensions will create. Stakeholder pensions will not provide better value.
"The FSA has stated it will not underwrite the decision-tree principle and also the stakeholder contract is inappropriate for the low paid. The FSB's model provides for the low paid and itinerant worker from day one - the Green Paper's original target."
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