Industry alternatives to the National Pension Savings Scheme (NPSS) could lead to accusations of mis-selling, warns Adair Turner.
Speaking at the National Pensions Debate in London, Lord Turner - head of the Pensions Commission - suggested there was a potential mis-selling risk with a carousel system of allocating people to providers as proposed by both the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF).
He said a carousel system, as suggested by the ABI, created the possibility of some funds providing poorer returns than others, and this could lead some people to question why they were allocated fund A, when their next door neighbour with the same amount of money was put into fund B.
But Turner added there was the same risk attached to investments whether they are made through different providers or whether it was the difference in performance between Super Trust A and Super Trust B, as proposed by the NAPF.
Before the four alternatives to the NPSS were presented to delegates, Turner added he believed the NPSS was the best way forward as it would provide “the lowest cost route with no risk disadvantage to the other proposals”.
Lord Turner also suggested the debate would come down to two issues, whether the industry wants a model with the lowest cost possible, or whether there is a positive value to choice, as he warned any model which offers an element of choice, such as the ABI ‘Partnership Pensions’, would also introduce extra costs in operation, administration, sales and marketing as providers spend money trying to persuade savers to choose them.
The event hosted by the Department of Work and Pensions (DWP) received presentations from four groups with alternative models to the NPSS:
- Partnership Pensions from the ABI;
- a workable NPSS from the Investment Management Association (IMA);
- Super Trusts from the NAPF, and
- a Universal Protected Pension from the Pension Reform Group.
As part of the introduction to the debate, Stephen Timms, minister for pension reform, said there were “four bold interlocking ideas” to come from the Turner report, which include auto-enrolment, mandatory employer matching contributions, a rise in state retirement age and linking the basic state pensions to earnings by 2010.
He added although the purpose of the debate was to discuss the NPSS and its alternatives, it was “important to keep in mind the coherence of the overall package”, and for this reason he said the government is planning to use two key criteria in mind while assessing the models.
Under these criteria, any successful model will have to increase the level of pension coverage and it will have to significantly reduce costs to the savers. But Timms added the alternatives also had to meet additional issues of consumer protection, governance, the employer burden, simplicity and the impact on existing saving.
Within the presentations, there were few developments from the initial proposals released at the start of February, although Stephen Haddrill, director general of the ABI, agreed the impact on existing saving should be looked at and as a result the industry must try to avoid “introducing a new system encouraging employers to dumb down to the level of the NPSS”.
He added employer contributions are an essential element of the package, but suggested small employers should in particular be catered to. Haddrill suggested there are ways of mitigating the effects of soft compulsion, but warned it can’t be removed altogether.
Expanding on the proposals for Partnership Pensions, Haddrill also said sales regulation will be unnecessary as there would not be high levels of sales advice, although it will not be totally unregulated.
He claims the insurance industry will sell direct to employers so there will be no intermediary, or commission-based sales force which will reduce costs to about half the current levels.
Haddrill added the ABI in its proposals is “trying to avoid the regulated point of sale advisory process we currently have”, echoing comments made by Turner earlier in the morning, where he said in order to deliver low-cost savings opportunities “we need to strip out up front set up costs, which includes IFA commission, and we need to strip out individual interviews which again generate IFA commission”.
Richard Saunders, chief executive of the IMA, made the presentation of a workable NPSS which focuses more on the investment strategy of the system, although he stressed employers must “buy into this or it won’t take off”.
He suggested any model would need to be simple for employers, with no choice between suppliers and minimum collection costs to keep it cheap and straightforward.
Like the ABI, which proposes a Retirement Income Commission, the IMA also highlights the need for an independent board to inspire confidence in the consumer.
Joanne Segars, policy director from the NAPF, also focused on the independent aspect with a board of expert trustees for each Super Trust who would also provide savers with information, acting as their “trusted guide”.
But she adds in its proposals, the NAPF doesn’t disagree with the objectives of the NPSS, instead they are concerned with the delivery and its issues is with the mechanism rather than the principles.
Finally, the Pension Reform Group presented their idea for a Universal Protected Pension which is unrelated to the NPSS format as proposed by Turner, instead leaving the basic state pension as it is and building a partly-funded model which guarantees between 25% and 30% of average earnings.
The proposal would be state-sponsored but run on a day-to-day basis by the private sector and would have some kind of independent governance which would be housed at the Bank of England.
Now the four proposals have been formerly introduced to the government and the industry, the DWP plans to hold a series of national pension debates around the country culminating in National Pensions Day on March 18th, after which final decisions will be made and fed into the White Paper on pensions reform scheduled for release in May.
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 7968 4558 or email [email protected]IFAonline
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