The Pensions Commission's proposed National Pension Savings Scheme model is the best solution for delivering affordable personal accounts to boost pensions savings, today's White Paper concludes.
The government says its view is based on evaluation not only of NPSS, but also of other models put forward in reaction to the Commission’s second report, which detailed the use of outsourcing rather than direct competition between providers to keep charges low.
The alternatives were set out in a May 2006 White Paper, which also identified some key attributes of any regime:
- employers need the ability to choose between providers,
- a central clearing house would be required to keep costs down
- restricting choice would be necessary to keep costs down
Accordingly, when reviewing the choices – NPSS versus another – the government looked at five alternatives: NPSS “plus”, NPSS “minus”, provider choice “minus", provider choice “plus”, and hybrid provider choice.
Outsourcing on the basis of providers competing for contracts rather than direct customers was at the centre of the first three of these alternatives. The last two focused on the ability of providers to compete directly against each other for customers.
Following consultations and evaluation, the choice between NPSS and a provider/competition alternative came down on the side of the former.
“The evaluation shows that the NPSS approach meets our key criteria of extending coverage, maximising participation and minimising cost,” today’s White Paper states.
On the point of access to choice, the NPSS again won out because it was seen as meeting the requirement of simplicity in the face of research suggesting consumers would save less if faced with what they may see as too much choice.
“All of the analysis points to the need for a successful model to: maximise simplicity; not require the majority to make decisions they find overwhelming; and provide choice for the significant minority who want it. This is one of the central reasons why we are proposing the NPSS model over a branded provider approach.”
“Only an NPSS model can deliver the simplicity and protection for the majority.”
On the point of minimising charges, the White Paper states the government saw a flaw in the provider model as against NPSS, despite both using competition as a tool in favour of the end customer.
The ability of individuals to be able to switch between providers directly competing for their business only works if there is sufficient knowledge of the market.
“Evidence suggests the target group are not well informed about this particular market. They find pensions confusing; they shy away from making decisions and their concern about making the wrong choice often means that they do not make any.”
“We have considered the competitive impact of each model in some depth. We do not believe the arguments are conclusive for either an NPSS or a provider choice model, but evidence shows that in the current pensions market competition does not always work to the customer’s benefit.”
The White Paper goes on to state how Ron Sandler’s review of the industry suggested there is little evidence choice and competition in the pensions industry can drive down costs.
Marketing is the chief culprit, the Paper suggests, because large sums are required to be spent on such activity to drive up switching to the extent industry-wide costs to customers are pushed down to similar levels offered by NPSS from the outset. It may be over time this occurs, but it is much less certain.
True, the NPSS model as outlined by the Pensions Commission did not take into account the cost of ensuring automatic enrolment actually takes place, but “it assumed that costs would be recovered over an individual’s full working life”. The government’s own analysis suggests the cost of providing personal accounts under the NPSS model in the short term would be about 0.5%, or 0.3% in the long term.
Additionally to that “there is no evidence that finance costs within a provider choice model would be cheaper than in an NPSS model”.
For all these reasons, it is the NPSS model which will be used to delivery personal accounts.
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 Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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