The Association of Consulting Actuaries (ACA) has expressed concerns over the Pensions Commission's proposals for a National Pensions Savings Scheme (NPSS), arguing instead for a risk-sharing proposition.
Prompted by a House of Commons adjournment debate on pensions reform -scheduled for tomorrow - the ACA says better incentives to encourage employers to offer good low-cost schemes which share risks between employers and employees should feature in the new reforms as an alternative to the NPSS.
Adrian Waddingham, chairman of ACA, says the organisation initially wanted to “chew over” the NPSS proposal when the Pensions Commission report first came out, but adds the ACA has grown more alarmed as each day has passed.
ACA claims defined contribution (DC) arrangements of this type, even with lower charges, usually do not work well for the lower-paid because of the considerable investment-risk involved, which falls entirely on the individual.
The organisation is also sceptical of whether the projections in the Pensions Commission report represent an accurate picture of the possible variability of returns, in a situation where restricted investment is inevitable.
In many cases, claims the ACA, the returns may merely offset any remaining means-tested which those on low incomes might continue to receive, as still 30% of pensioners are expected to be on means-tested benefits by 2050.
And another problem with the NPSS, according to ACA, is it suffers from the fact individual advice has not been costed into the proposals.
As an alternative to the scheme, ACA says it is perfectly possible to promote a lower cost risk-sharing model fro workplace pensions that would better protect those on lower incomes from investment risk.
The aim would be to build these “new” workplace pensions on top of the proposed improved state pension, offering benefits based on career average earnings, with contribution levels of around 10% of earnings from employers and 5% from employees. The contributions would start low, and then build up in later years.
But to make a risk-sharing proposition work, ACA says the government will have to remove some high costs enforced by the law, and reinstate some of the safety valves that make risk-sharing schemes so attractive to employers and employees, such as allowing schemes to hold back on pension increases to help reduce deficits.
Waddingham says the complete absence of help for employers in the Turner report may have hastened the recent closure of more pension schemes.
He adds: “It is incredible that Turner offers to help the state trim pension costs by increasing pension ages retrospectively, but does not offer the same help to hard-pressed employers.”
ACA also points out the tightening of the regulatory "knot" on the present generation of risk-sharing defined benefit schemes must stop as it is forcing wholesale closures of good schemes to the cost of millions of employees.
Waddingham continues: “Unless the government, supported by the Pensions Commission, takes some brave decisions, risk-sharing pension schemes shortly will be open to pretty well only public sector employees.”
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