The Pensions Commission has acknowledged it would be "dangerous to proceed" with a national Pensions Savings Scheme (NPSS) without making allowance for individual advice if a compulsory employer contribution is not included.
In it’s third and final report into the state of UK pensions, the Commission admits lower rates of return for individuals, and the possibility in “extreme cases of negative real returns, would make it dangerous to proceed with an automatic enrolment system without individual advice”.
But it adds including this necessary advice would increase costs and “further depress rates of return and pension incomes achieved, negating some of the gains form introducing the NPSS”.
As a result of this refusal to allow advice, Alexander Forbes Financial Services claims the model is dangerously flawed, and the lack of advice makes it dangerous to proceed even with employer contributions at the proposed levels.
It says it is concerned it will lead to many workers, particularly the low paid, to being misled about the benefits they will receive, including assuming the 8% funding level is sufficient to provide a satisfactory retirement income, and a risk employers will “level down” their existing schemes to the NPSS levels.
David Marlow, director of Alexander Forbes Financial Services, says any initiative which encourages people to save towards their retirement has to be welcomed, yet advice is essential if they are to fully understand and benefit from their savings.
He adds: “Unfortunately the NPSS runs a real risk of lulling workers into a false sense of security. A total pension contribution of just 8% of earnings per annum is insufficient to ensure a comfortable retirement income, yet the NPSS gives it a spurious veneer that this level of contribution has some kind of official endorsement.”
Marlow suggests the consequences may be worse as low paid workers may get no benefit at all from their workplace savings, as they are unlikely to exceed the pension tax credit threshold.
He continues: “Turner has acknowledged the dangers of omitting advice from the NPSS, but appears to view an employer’s contribution as more than compensating for this omission. In my mind this is dangerously muddled thinking. Good advice is essential for delivery of good pension provision.”
Mike Morrison, pensions strategy director at Winterthur Life, says with an auto-enrolment system, employer contributions will have to be in place for it to work, but adds Turner is still missing the point about communication and education, and the fact people need to be encouraged to join a pension.
However he points out in the latest report the Commission didn’t quite focus on the 0.3% figure so much, instead suggesting between 0.3% and 0.6%.
Morrison says: “It seems like they’ve put a bit more thought into it and realised you can’t do everything on the cheap. A figure of 0.6% would give providers a little more scope to provide communication, so this is quite a positive point.”
But Adrian Boulding, pensions strategy director at Legal & General, says he wouldn’t use the word advice, as in the world of the Pensions Commission, this involves sitting down for hours with an IFA to discuss tax planning, and financial arrangements.
Instead he says if you look at this from the view of the target number of the 10 million people not saving, all they need is some explanations and some hand-holding, and be able to see someone in the flesh to engender the confidence to join a pension and provide guidance on the suitability of joining.
He adds: “There are serious questions of suitability in areas of personal debt and income protection, but I believe IFAs are amazingly well-placed to deliver all this as they have the best links into small businesses.”
Boulding suggests IFAs could do this through workplace presentations, workshops and clinics, so instead of doing a full fact-find and in-depth planning, advisers would instead have an important role to play in providing explanations and guidance.
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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From 1 April 2019
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