The Treasury has indicated a National Pension Savings Scheme (NPSS) or alternative "could be useful" in helping the savings gap during discussions with the International Monetary Fund (IMF).
Published in the latest UK country report from the IMF on the health of the economy, a discussion on the subject of an aging population saw the Treasury answer questions on the three main proposals from the Pensions Commission’s report.
In the document, the IMF notes Treasury officials had mixed reactions to the proposals when questioned ahead of the White Paper scheduled for May. With officials first of all pointing out the Pensions Commission “does not take housing wealth into account in forecasting the savings gap”, which suggests figures may not be accurate.
While IMF staff conceded estimates of the savings gap are uncertain, Treasury officials said, to the extent that a savings gap exists, they agree “a defined contribution scheme with auto-enrolment [NPSS] could be useful”.
Discussing other parts of the Pensions Commission’s recommendations, officials claimed reform of the state pension system suggested by Lord Turner and the Commission would involve higher government spending particularly between 2010 and 2020, and they argued it would have to compete with other government priorities.
Treasury officials also argued there is no definitive evidence to suggest means testing reduces saving, but noted the spread of means testing could be reduced by lowering the minimum guaranteed pension income relative to average earnings.
But IMF staff pointed out to officials the reform proposals for the state system would be close to fiscally neutral by 2050, while without reform around 70-80% of pensioners would be subjected to means tested benefits by 2050.
IMF staff contradicted Treasury officials by stating the introduction of an NPSS or alternative would be less successful “if the state pension were not reformed, as the spread of means testing would discourage private saving”.
Officials taking part in the IMF discussion included the Chancellor of the Exchequer, the Governor of the Bank of England, the chief executive officer of the Financial Services Authority (FSA), along with other senior government officials and representatives from research institutes, labour and business organisations, and financial institutions.
John Lawson, head of pensions policy at Standard Life, says without a doubt the Treasury has come out in favour of the NPSS or alternative. He says: “This is as close as it gets in civil servant and official speak. This means the chances of getting a NPSS or alternative are extremely high. We’re not just going through the motions.”
But Alasdair Buchanan, group head of communications at Scottish Life, says the statement is quite lukewarm. He adds: “It doesn’t strike me as being unequivocal, as there a lot of elements in this, with a lot of it being a restatement of Treasury policy including the idea means-testing does not affect savings.”
Buchanan adds the interesting part is the IMF effectively saying we will have a problem with any model including a NPSS or its alternative, if we don’t reform the state system first.
“The complexities of the current system have a negative impact on the NPSS, or any systems, and the IMF highlights one of the least satisfactory elements of the NPSS, in that it’s a product solution which is unlikely to be successful until the state system has been reformed,” says Buchanan.
Meanwhile, Rachel Vahey, head of pensions development at Scottish Equitable, says the Treasury’s admission is encouraging as three areas of Government need to sign up to the proposals outlined in the White Paper to get them to work in practice - the DWP, the Prime Minister, but also the Treasury.
She adds: “Without the Treasury on board you wonder if any radical changes will ever see the light of day. All are agreed the state pension system needs to be reformed, and this will cost money. It is now up to the Treasury to decide where in its list of priorities it sees this as sitting. There is always the risk that as this is an issue that will bite tomorrow rather than today, it will struggle in the attempt to gain priority.”
Vahey also points out all the responses to the NPSS so far have agreed a reform of the state pension is needed to make any model work, a part of which is to remove means-testing. She warns while we have means testing the introduction of auto-enrolment will open up more categories where it may not be in the person’s interest to join a private pension scheme.
“The Treasury’s note that the Pensions Commission does not take housing wealth into account, was somewhat surprising, as in the executive summary of the report, it admits "savings through house purchase and inheritance of housing assets will make a significant contribution to pension adequacy for many people, but housing cannot be considered a sufficient response to pension adequacy problems for all people", says Vahey.
She adds the Pensions Commission is then presumably working off the basis that housing wealth will not be a significant factor for the specific target of the NPSS.
Buchanan agrees with Vahey housing wealth will not help the majority of people, as there is a strong correlation between those who are not saving for the future, and those people who do not own their own home.
He says: “This is an ongoing debate, but our view is not to rely on housing wealth. Looking at the average situation doesn’t actually tell you very much, we have a spectrum and the people who need the most help planning for retirement are those who don not own a house.”
Meanwhile Lawson adds the Treasury is merely reiterating their policy, as the Government has always said housing wealth should be taken into account, although he adds the Pensions Commission had good reasons for not including it as most equity release schemes don’t produce a large income in return for that given up.
“The most use people could of got out of housing is if it had been allowed into pensions. Although there may be the possibility of equity release through Real estate investment trusts (REITs), where people sell their house to a REIT, but that is really only a realistic possibility later on in life,” says Lawson.
He also warns when looking at pensions saving, houses are a bit inflexible, as people need somewhere to live, and the option of down shifting and selling large houses to buy smaller ones, or moving to a less expensive area, would only lead to a narrowing of houses prices.
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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