The introduction of a National Pensions Savings Scheme (NPSS) or alternative model is not as safe as the Pensions Commission would have us believe claims Scottish Life.
It claims the publication of the Parliamentary Ombudsman’s report, “Trusting in the pensions promise”, last week into the loss of pensions for members of defined benefit schemes, highlights the serious consequences of the Government, or anyone else, providing inaccurate, incomplete, inconsistent and misleading information.
Scottish Life says the Pensions Commission claims auto-enrolment into the NPSS is ‘safe’ because of the compulsory employer contributions, but it argues this is simply not true. It claims the NPSS and the various proposed alternatives all carry considerable risks of financial detriment to many of the people who can least afford it.
According to the company, the Pensions Commission’s assertion the proposals are ‘safe’ appear to be based on the fact the compulsory 3% employer contribution will broadly cover the loss of means-tested benefits, which means many individuals would get no benefit from their employer’s contributions.
It says this is bad enough, but points out in reality it is possible employers might try and manage their payroll so the additional costs of compulsory contributions are met, either completely or in part from a reduced wage bill. Which means the cost of the wasted contributions would fall on the individual employee.
Steve Bee, head of pensions strategy at Scottish Life, says the sort of people most seriously affected by this are those closest to retirement, those on lower earnings, women with career breaks and people who have little existing savings.
He adds: “Against the background of the Ombudsman’s scathing report, it seems incredible we seem to be sleepwalking towards another such disaster. We cannot afford to further undermine trust in pensions.”
Bee warns it is absolutely critical the Government, the industry and anyone with an interest in pensions, recognises the reality of where this would lead. He adds the NPSS and the proposed alternative will guarantee only one thing, and that is further serious problems for pension provision in the UK.
John Lawson, head of pensions policy at Standard Life, says although he is loath to draw comparisons with the people covered in the report, there are issues with the proposed system, although it would be more likely people would lose a few pounds a week, rather than their entire life savings.
He says: “I don’t agree it will be a disaster, but you can’t warrant it is a safe bet to save in an NPSS model, as there will always be some element of means testing. A warranty to say if you save in the NPSS you won’t end up in a situation where you have some savings taken away from you, can’t be given by the Government, and a NPSS could have some nasty side effects.”
Lawson adds the only way out of this would be to increase the basic state pension and have it as the only state benefit you get, and the rest is up to the individual, which would be a much clearer system.
But he warns, if people do save in the scheme and then lose some of their savings, it will be very difficult for the Government to avoid responsibility, by telling them they had the opportunity to opt out, and why didn’t they, when it is widely recognised many people are not financially literate and can’t make that call.
And Adrian Boulding, pensions strategy director at Legal & General, says it has very grave concerns on this issue which stem from the very poor ratio of employee to employer contributions, which is not a very good return on the money and is a significantly worse ration than many pensions are running on at the moment.
He adds: “Turner has proposed a significantly worse ratio, and it means an employee may need to think very hard if there are other higher priorities for their money, such as debt repayment, or life cover and income protection depending on their circumstances, along with more favourable schemes offered by an employer like an all-employee share plan.”
Boulding also points out on top of this is the issue of means testing, which for those people with some way to go until retirement will be a complete unknown, although it is still likely to play a huge part in the pensions system.
He warns: “There is a chance this will result in people sleepwalking into pension schemes without realising there are other more suitable things they should be doing with their money.”
But Rachel Vahey, head of pensions development at Scottish Equitable, says Turner claims auto-enrolment is needed to make the NPSS work in practice, and all the alternatives have said the same, but have added it can’t just be auto-enrolment on its own.
She adds: “It has to be part of a package of three measures including mandatory employer contributions and state pension reform. It is widely recognised reform of the state pension is an essential element of the package, which should see means testing reduced, and this should help to avoid the affects outlined by Steve on the safety of auto-enrolment.”
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
Has been cold-calling consumers
New shares admitted to London Stock Exchange
Slow and steady growth
Missed funding target by £240,000
Denies any wrongdoing