Government should offer employers providing good existing pension schemes access to a £2bn incentive fund to stop schemes from levelling down, says the National Association of Pension Funds.
In its 57-page response to the pensions white paper on personal accounts, the NAPF says levelling down is still a strong possibility, and although the government has adopted a number of measures - including prohibiting transfers and a simple scheme exemption test – more needs to be done.
The organisation is suggesting the government should set up a fund of around £2bn a year to offer practical support and encouragement to employers to keep their high value schemes.
It proposes the establishment of a ‘Good Pension Fiscal Incentive’ which would provide employers offering schemes with high-value contributions, a small rebate during the three years of transition – 2012-2015 – to encourage the continued provision of good quality workplace schemes.
And to help make sure the new system of personal accounts are only targeted at low earners and those without existing pension provision, the NAPF wants the Personal Accounts Delivery Authority (PADA) to be given a specific objective of “optimising participation and saving among those in workplaces without a good pension”.
In its response, the NAPF suggests the upper age limit for auto-enrolling into personal accounts should be the state retirement age, although its admits some further analysis, and consultation, should be undertaken in the case of those close to retirement when personal accounts are introduced in 2012.
The organisation also agrees to the idea of re-enrolling people every three years, although it suggests this should be done at a set time every three years rather than on the anniversary of somebody opting out, otherwise employers would be continually enrolling people and the administration costs would increase.
But while welcoming the introduction of the PADA, the NAPF points out advice will be a key objective of the new authority and suggest there should be a two-tier approach, with the first stage consisting of basic advice, provided by the scheme itself, followed by a second tier of face-to-face advice, provided through the workplace.
That said, the organisation warns the government also has a direct role to play in ensuring people can make informed decisions, especially with regard to information about state pensions, and as a result it suggests the government should restart work on the Online Retirement Planner which it scrapped last October.
At the same time, although the NAPF says it supports the goal of low charges, it warns the “quest for low charges should not compromise the quality of the default investment options, administration and member information”.
In addition it warns there must be no “state subsidy or ‘seed capital’” for the new system because it will sit alongside existing pension provision, and in order to avoid unfair competition the NAPF argues it “is essential that the personal accounts scheme is entirely self-financing and not subsidised out of general taxation”.
The paper also outlines the NAPF’s approach to the investment of the funds, including the call for an investment sub-committee, while the organisation points out the same tax rules for decumulation which apply to existing pension schemes should also apply to the new scheme as allowing an alternative approach would “introduce unwelcome complexity and arbitrage into retirement planning”.
Although on the other hand the NAPF says it encourages the government to review the decumulation market, especially with regard to the rules regarding trivial commutation and the operation of the Open Market Option (OMO).
It thinks the government’s proposal for a revised process involving a two-stage decision – first deciding the type of annuity, then the choice of provider - may be the best way of achieving better outcomes.
Joanne Segars, chief executive of the NAPF, says the government’s reform package, auto-enrolment and mandatory employer contributions, into either the best of today’s workplace pensions or personal accounts, will revolutionise pension saving.
However, she suggests out as the reforms do entail some risks - the risk of levelling down, the risk of poor design for the target group and the risk of weakening the employer link - the government must design personal accounts to hit the target group and provide support to existing pension provision.
Segars says: “The good stewardship of personal accounts will be essential to encourage trust and participation. Our proposals for the structure and governance of the personal accounts regime draw on the experience and best practice of today’s occupational pension schemes.”
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 Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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