John Hutton, secretary of state for Work and Pensions, has admitted the new system of personal accounts announced in the pensions white paper will not come with a government guarantee in the event of failure.
Giving evidence at the Work and Pensions Select Committee’s inquiry into pension reform, Hutton also revealed the government is favouring Lord Turner’s National Pension Savings Scheme (Npss) as a model for the new accounts system.
Answering questions on how the proposed Npss will work, Hutton admits there is still a question over how the scheme will be administered although he says the government's "basic instinct" is to go with Turner’s model as it is the one most likely to reach the target cost of a 0.3% annual management charge (AMC).
But he says while the government wants the costs to be kept as low as possible it will be working closely with the industry over the coming months to look at all the options and work out the details, as the industry “are the ones who will be delivering these schemes”, as neither the government or the Department for Work and Pensions (DWP) will be responsible for delivering returns on investments.
Hutton also made it clear the new scheme would have no government backing in the event of a failure, saying there are inherent risks and it would simply be impossible fro any government to offer a guarantee.
When asked by Anne Begg, Labour MP for Aberdeen South and a member of the Committee, if this meant if a fund failed the government would not make up the shortfall, Hutton admitted this was correct.
He says: “The government can’t offer a guarantee, there is a risk with all types of investment and it is not possible for a government to underwrite an entire scheme. There will of course be safeguards and legislation but the risks will still be there. There is no question of the government underwriting the Npss.”
Hutton points out “people aren’t daft, they know there’s a risk in saving, we just have to minimise the risk as much as possible”, but he says no government either could or would ever provide a guarantee for private savings as it is just not possible.
As a result he says this is why the government has set a target for 2012 for the implementation of the new personal accounts, adding 2010 as proposed by Lord Turner was too “optimistic” as the government has to get the consultation and primary legislation right as it “can’t afford a cock-up on this”.
Hutton also touched on the subject of employer contributions, repeating the offer made by James Purnell, the Minister for Pensions Reform, to enter into discussions with businesses to discuss their concerns over the contingent compulsion and the problems of implementing the scheme.
He suggests the discussions will continue through the summer and autumn, and following on from the pensions summit to be held by the DWP in July. However despite the feedback, he warns on no account will small businesses be exempted from the Npss.
This is because it is typically the people working for these smaller firms who the Npss wants to target so by excluding them the government would be doing something “unhelpful”.
But Hutton says nothing else has as yet been ruled either in or out, and the DWP would welcome any suggestions how to lessen the impact of the proposed changes, with the idea of some kind of subsidy “still being a possibility”.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says the idea of the government not giving a guarantee for the Npss is something the industry already knew to some extent as the bottom line is it is a large money purchase arrangement.
But he says the statement underlines the importance of getting a communication framework around the Npss, to avoid the mistakes made with final salary schemes where the information should have had some kind of qualifying statement to say while most final salary schemes are a good idea, some do go bust.
McPhail adds: “It’s helpful Hutton has spelled out the reality of the situation, but it depends on what the government is going to do now. There is a lesson to be learned here about paying attention to what you tell people and how you tell them, as if something goes wrong twenty years down the line we could be in the same situation today where people are left with nothing.”
Rachel Vahey, head of pensions development at Scottish Equitable, agrees it would have been more surprising if the government had offered a guarantee, but warns they seem to be treading a very fine line.
She points out to make sure people don’t lose out in the scheme there needs to be a choice of investments, but the problem is investment decisions and most people will inevitably end up in the default fund which will probably be mainly safe investment funds such as trackers.
But because it is planned as a non-advised model, younger people who have over 40 years to save for retirement once they’re auto-enrolled may still end up in safer low yield funds, when they could opt for slightly riskier investments with higher returns.
Vahey says while she sees the government’s point of view in not wanting to underwrite the scheme, she points out if things all go horribly wrong and people start making claims the buck has to stop somewhere.
She adds: “It seems they want to auto-enrol all these people and make them save but don’t want the responsibility which comes with it, so they are walking a very fine line as it is not possible for them to have their cake and eat it.”
Meanwhile, Hutton has also defended the decision to continue with a contributory based state pension rather than residency, on the grounds it provides more radical help for women and carers in a faster time scale, and keeps the “something for something principle” which he says is very important.
The Secretary of State also came as close as possible to saying the earnings link to pensions will be delivered in 2012 despite the alleged “get-out clause” it would be subject to affordability.
Questioned continuously by Committee member Justine Greening, Conservative MP for Putney, on whether the phrasing which continues “at any event it (the link) will be restored by the end of the next Parliament” would mean the link would be implemented even if it is still unaffordable, Hutton stated the possibility would not arise.
He says: “Our objective is to restore the link in 2012, as the move will be affordable in the next Parliament. The only reason why we have added these words is to say as it is six years away the decision will be confirmed nearer the time in case of unforeseen circumstances.”
Hutton points out it is only reasonable and sensible to add this wording, to allow for the Chancellor make a decision nearer the time, although he adds “the department (DWP) is working on the assumption it will be 2012”.
But he warned anybody who believes a new labour Prime Minister coming into power once Tony Blair leaves, such as Gordon Brown, would not reinstate the link should “forget it”, as “we will be doing this in the next parliament as we believe it is affordable and that is the view of the whole government including the Treasury”.
Hutton adds “a government does not publish a white paper unless every minister is in agreement including the Chancellor”, adding “this policy is agreed and will be delivered in the way set out in the white paper”.
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