The Pensions Reform Group (PRG), led by Frank Field MP, former Minister for Welfare, is meeting with the Prime Minister today to put forward an alternative method of financing the reform of the basic state pension.
It proposes an investment led reform of the system, instead of the tax led reform proposed by the Pensions Commission, and argues this is the “chance of a lifetime” to get a major investment led pension reform through and onto the statute book.
The report, entitled “The Chance of a Lifetime”, says an opportunity has been created by the success of the Chancellor’s Pension Credit strategy which concentrates help on the poorest pensioners.
It argues the crucial decision the government has to make is on getting the structure and governance of future pensions right, as the additional contribution rate to finance the reform can be settled when the Chancellor thinks it is prudent to do so, and when voters have had the chance to see the new scheme in operation.
The PRG says its proposals meet the Chancellor’s demands that reforms should be both affordable while increasing public trust. It suggests:
- The basic state pension should increase in line with prices during a person’s working life
- At retirement a Universal Protected pension (UPP) valued at between 25% and 30% of the national average earnings is paid, made up of the basic state pension and a new funded pension, both parts of which will be indexed in line with earnings.
In today’s prices the PRG says the total pension would be worth £130 a week compared to the current pension of £82.05. The PRG proposes to finance this increase by redirecting the national insurance rebate, used in contracting out of the State Second Pension (S2P), into the new fund.
Although it admits not everybody contracts out of the S2P and draws the rebate, the PRG says of those who do, the rebate alone invested over a person’s working life, together with the basic state pension, will meet the minimum target of £130 a week.
It also warns additional contributions will be required to index the pension to national average earnings, which will be done by increasing national insurance contribution by somewhere in-between 1.5 and 2.9 points.
The PRG says its proposals are the best way forward for the government, as there would be distinct risks for savers if the government decides not to reform the basic state pension, while preserving the pension credit and simultaneously moving ahead in establishing a National Pension Savings Scheme (NPSS).
It claims such a scenario would be the worst of all possible outcomes, as large scale eligibility for pension credit would remain while many of those at work may be persuaded to save through the NPSS who would be best advised not to do so, adding that establishing a NPSS in these circumstances would open the government to giving mis-promotion and, the private sector, to mis-selling charges.
Therefore on the issue of public trust, the PRG suggests the crucial question is which method of financing the system will be better protected from political cuts and interference, the investments in real assets as proposed by the PRG, or the pay-as-you-go financing proposed by the Pensions Commission.
To address this issue and to safeguard the investments PRG proposes a governance structure similar to that of the Monetary Policy Committee of the Bank of England, where the UPP would be guarded by a set of governors appointed by the Government and who would be housed at the Bank of England.
- Reflect on the long term nature of the pension problem,
- Each governor would be appointed for around 15 years, with the appointments staggered over time,
- The duty to run the UPP to deliver a pension of between 25% to 30% of average earnings would be set in legislation,
- And each governor would have a fiduciary duty placed upon them
The PRG says its proposals will build on, rather than disrupt, the Chancellor’s pension strategy and will capitalise on the opportunity for long-term investment led reform created by the success of the pension credit.
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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