Adair Turner believes the proposals put forward in the pensions white paper on state reform are a "reasonable compromise", and is pleased the government did not bow to pressure to remove contingent compulsion for employers in its plans for personal accounts.
Speaking at the Trades Union Congress (TUC) annual Member Trustee Network conference: Pensions From Reform to Reality, Turner says while there were some minor differences to the proposals put forward by the government, it had broadly adopted the structure put forward by the Pensions Commission.
He called the white paper reforms to the state pension a “reasonable compromise” despite the fact the link between the basic state pension and earnings will be implemented at least two years later than Turner suggested, and the state pension age will rise six years faster.
Turner points out while there are concerns over the government’s ideas of affordability, he says he is not unsympathetic to the role the Treasury plays, as it is it’s job to be the hard man in relation to public finances.
But he says at the end of the day the government has come up with a reasonable compromise, adding the two year delay in re-linking the state pension to earnings will not make much of a difference over the long term.
He points out if the state system stays on the current process of being linked to prices until 2050, the basic state pension will be worth just 6% of average earnings, while re-linking it to earnings in 2010 will make it worth 16.5-17%, but delaying the link by two years will only decrease its worth by a quarter of a percent to 16.25%.
Turner also dismissed fears over the so-called Treasury get-out clause where the link to earnings will only be continued while it is affordable, and with the date for re-linking the pension to earnings aimed at between 2012 and the end of the next parliament.
Answering questions at the conference, Turner says the worst case scenario is the link will be reinstated by 2013 rather than 2015, as the possibility of two consecutive five year parliaments is unlikely, but he firmly believes the date will be 2012.
He says this is because the year is already in the public domain, with both opposition parties in favour of the timetable, and very likely to campaign in future elections on the basis they will restore the link in 2012, as a result he says he is “willing to enter into some reasonably sized bets that the date will be 2012”.
In addition to the reforms for the state pension, Turner also welcomed the outline for a National Pension Savings Scheme (Npss) or personal accounts as they are called in the white paper.
He says while the government is also intending to go forward with the idea of a Npss in “some way or other”, he admit to have been worried before the white paper was published, that the government “might bottle out under business pressure” over the role of compulsory employer contributions.
But he says he was relieved to see the government did not bow to the pressure and listen to “those siren voices at the Confederation of British Industry (CBI)”, of which Turner used to be chairman, who claim contingent compulsion would particularly damage small businesses.
Meanwhile Turner also defended the proposals for a minimum of 8% contributions into a Npss or personal account against the prospect of employers levelling down their current more generous pension contributions.
Although Turner admits there is some danger this will happen, he says it is important to still take the risk as you can’t use it as an argument for having no minimum contribution level.
At the moment he says there is a levelling down to zero, which is why many people do not have any kind of pension provision, and he argues the contribution levels put forward by the Commission and accepted by the government are an effort to put a floor to this levelling down to ensure people saving have some employer contributions.
But he points out there is “very little danger” of this happening among larger employers such as Tesco, BP, Glaxo who have an image to protect, as they are unlikely to reduce pension contributions for the same reason they pay more than the minimum wage, it is not the sort of reputation they want as a cheap employer.
And while Turner admits it is more likely mid-size companies will engage in levelling down, he says there are ways in which it can be guarded against, with the key being communication to accompany the launch of a Npss which shows how and why pension contributions are a tax efficient way of getting paid.
He says there is the need to try and create a culture among employers it is better to offer a scheme which offers more than the minimum, while teaching employees to look at the pension offered as a important benefit.
However Turner says it is also important the 8% level of contributions to a Npss should always be described as the minimum level, with the suggestion people should be saving more than this, while also actively encouraging other types of ideas such as salary sacrifice to incentivise people into saving more.
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]comIFAonline
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