Standard Life has submitted evidence to the Treasury Select Committee which claims the cost of running a National Pension Savings Scheme is likely to be far higher for the private sector than it would be through a State-run plan and is likely to run up costs of around £3.5bn.
In its submission to the TSC, Standard Life says the flat annual management charges as proposed by the Pensions Commission would not cover the substantial investment required in the early years of any new system.
Its analysis, based on the estimated costs contained in the second Pensions Commission report and the assumption around 200,000 people a year will drop out of the scheme, reveals the NPSS, in its original design, would run up debts of £3.5bn by its 18th year, and would not break even for 30 years.
Standard Life uses the assumption six million people will save through the NPSS at charges of 0.3% annual management charge (AMC), and using figures from the Pensions Commission report, it says the setting up of administrative systems and IT would cost £500m, in addition to account set-up costs of £90 per member, account maintenance costs of £25 per year as well as an extra paid-up account maintenance fee of £19.50.
It says the average annual amount saved by each member would be £1,000 and if people retire in a 40-year cycle, this would mean 150,000 would retire each year, with termination expenses of £90, although this would be balanced by the same number of people joining the NPSS each year.
However an additional 200,000 people are expected to drop out of the scheme each year for various reasons, and this lack of persistency increases the debt as when people retire or leave the scheme, the 0.3% charges also stop.
Combined with a nominal rate of growth of 6% per year and interest on debts charged at 4%, based on long-term gilt yields, Standard says the NPSS will run up debts of £3.1bn by year 16 and £3.5bn by year 18, assuming cost and contribution inflation of 4% a year.
Because of this, Standard Life questions whether MPs would be prepared to support a government-run NPSS which would require the country to borrow to subsidise the charges proposed by the Pensions Commission, and whether they believe the policy would last long enough for the scheme to break even.
As a result, Standard Life suggests if MPs are still in favour of an NPSS, the only other alternative would be to ask the private sector to run the scheme, although it says the economic and structural costs of an NPSS-style alternative with an Annual Management Charge (AMC) of 0.3% would be little different for the financial services industry than it is for the government.
It even suggests, the cost of running the scheme would be higher to the private sector for two reasons:
- In addition to supplying initial start-up capital and subsidising charges, the industry must also hold capital reserves for solvency margin capital;
- The cost of capital is higher for the private sector, than it is for the government, as the industry raises equity from its shareholder who will be expecting a typical return of between 10% to 15% on their capital, a substantially higher rate than the government can borrow money at.
And Standard Life points out in the case of a NPSS, shareholders are likely to demand an even higher return, because of the added risk of a long payback period and the fact no previous pension reform has lasted much beyond 10 years.
To combat this, Standard suggests an alternative charging structure to reduce the capital strain, including a mixture of a regular monthly administration fee of £2 a month, alongside the 0.3% AMC.
Using the figures from the Pensions Commission, that the average NPSS member saves £1,000 a year, it says the switch to this style of charging structure would have minimal effect, as the net loss of retirement savings with the basic charge of 0.3% AMC would be 6.63%, which only increases to 8.87% with the additional £2 a month fee.
This, claims Standard Life, is still good value compared to the net loss of 20.76% from a current stakeholder pension with charges of 1.5% for the first 10 years, before dropping to 1%.
Standard Life also points out if the government does want the financial services industry to run an NPSS-style scheme, then industry and the government must be willing partners, adding the “industry is not seeking to make excessive profits from running such a scheme and has suggested this is overseen by an independent regulator”.
As a result one of the company’s recommendations to the Select Committee, is to explore alternative charging structures to the ones already proposed, while looking into the benefits of an independent regulator, whose job would be to ensure savers get a fair deal.
Jonathan French, a spokesman for the Association of British Insurers (ABI), says the organisation has always said the economics of any completely brand new system would be unique and it is not possible to credibly put a figure on the cost.
But he adds: “It would obviously take a while for any system to bed in, which is why we suggested the need to commission some sort of regulatory body to look at the management charges on the pension accounts to ensure they are in the best interests of the saver.”
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