Adair Turner has approached the Investment Management Association (IMA) to examine cost-effective ways in which National Insurance contributions might be pooled and put towards a pension.
Richard Saunders, chief executive at the IMA, says the trade body has also been in discussion with the Department of Work and Pensions (DWP)and the Treasury over such a model, which is similarly used in Sweden and Chile, while New Zealand is also moving in that direction.
Saunders points out over the past twenty years, the UK has gradually moved from a State flat-rate system to one of means-testing, while many other countries have moved in the opposite direction.
The IMA believes the UK needs to move back to a flat-rate state system, however, it says the government is concerned about the cost-effective nature of outsourcing State pensions management, and has therefore moved to block such a system because it believes is too expensive.
Saunders says the IMA has therefore been approached by the DWP and the Pensions Commission to look at the practicalities of creating individual retirement funded accounts, which would prevent the government from touching funds but allow Whitehall to explore ways of keeping the cost down.
He says key to the solution lies in reducing the cost of administration and distribution within the pensions system.
Speaking at the Investment Management Association annual dinner in May, Turner said: “The total administrative costs of the UK state pension scheme are about 0.1% or less of the value of the accrued rights.”
Moreover, Saunders says: “The key pointer to moving forward is the idea of a public/private partnership. This has become commonplace in other areas of Government, but has not so far reached state pensions.”
Saunders points to the current National Insurance system within the public sector, whereby the Contributions Agency has been set up to collect NI.
He says: “With its unique identifier in the shape of the National Insurance number, it is well-placed to take the burden away from the industry, of keeping track of individuals.”
He also argues funds provide a good vehicle for investment because of their transparency, in contrast to current government provision, which collects the money from taxpayers and hands it to today's pensioners. But, he says, it is also important to assess how such a fund would be managed.
Saunders believes there has been no specific discussion as to who and how such a structure might be managed, adding: “The structure would need to a version of that typically found in Personal Pensions (PPPs) - ultimate government ownership and responsibility but substantial delegation of management responsibility to the private sector.”
The charge format of such a system has not been discussed, however, Saunders believes it would be close to institutional charge levels.
Early IMA estimates suggest a scheme of this sort could result in new flows for the industry of £10bn a year.
The IMA says it has spoken with a few private member firms, however, such a fund would develop in addition to and separate from the retail market.
Adrian Boulding, pensions strategy director at Legal & General , says he is aware of Turner's interest in a so-called 'Swedish model', but suggests his thinking is "as preliminary as the flat-packed furniture made in Sweden".
Boulding says Sweden gathers 2% of earnings, and puts it into a State pension system run by a group of appointed fund managers.
That said, he cautions against the application of such a model within a UK environment, as he believes one needs to look at what you would get for your money.
Boulding believes there is "much that wouldn’t get done" if a Swedish model were applied to the UK State pensions system, and the cost would then fall to another area.
He says while the National Insurance system is run in an affordable manner, there are a number of services it does not provide for, which are applied to the current private pensions system, and those costs need to be taken into account.
He says the service provided by IFAs is a value-added one, while the UK pension system provides guidance for its employer and employees, and guidance regarding changes in legislation.
Nathan Parnaby, marketing director at Standard Life, also believes such a system would be too expensive to implement within the UK.
Taking the example of 2% used within the 'Swedish model', he believes this would not be enough to offer the population a decent retirement income.
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 Gareth Vorster on 020 7968 4554 or email [email protected].IFAonline
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