Pensions: gambling with our future?

Despite much speculation in the run up to its publication, the Turner report
pulled no punches, laying out ideas that now need to be turned into workable and
affordable government proposals, through liasing closely with employers, unions
and trade bodies.

It may not have been within the original brief for the Pensions Commission,
but Turner appears to have addressed the difficult issue of state pensions
reform in a balanced way. The report highlights the direct trade off that exists
between extending the state retirement age and increases in public expenditure,
which are ultimately funded through higher taxation.

State benefits currently cost approximately 6.2% of GDP. Even with a
staggered phasing to later retirement ages of between 66 and 69 years between
now and 2050 could result in that cost increasing to between 7.5% to 8% of GDP,
if current demographic estimates for the ageing population are borne out.

The challenge of managing the balance on this issue falls squarely to
ministers and will be the main subject of fiscal debate over coming months, as
will the reform of means testing and the second state pension.

The recognition by the commission that means testing is a barrier to saving
and needs to be removed is positive. However the proposal to maintain both the
Basic State Pension and S2P in the transition to a flat rate state pension could
prove confusing.

Equally confusing are proposals to remove contracting out for direct
contribution schemes, while retaining the facility for defined benefit schemes.
This appears to remove the capacity to contract out

of S2P without a quick transition to a flat rate universal state pension,
which would provide a clear distinction between the role of the state and the
private sector.

Turner recommends that the role of state provision should be to remove people
from poverty, and to do so on a universal basis in future with qualification for
benefits based upon residency not contribution history. This is consistent with
calls from AXA and others, for a universal state pension.

Although the timescales over which the transition to a flat rate benefit
takes place are likely to be long, if pursued. The role of state reform in
addressing the most disadvantaged under the current system – namely women,
carers, and those with incomplete contribution records – will need to be
considered within these proposals.

The proposals for a National Pensions Savings Scheme are even more
contentious, not in the objective to provide a safety net for those who don’t
have adequate company provision, but due to assumptions which have been made
about how this might operate on a low cost basis, and what format this might

The commission has focussed on cost as the key driver to providing value to
those who do not currently have quality company provision. The proposal to auto
enrol employees at a proposed level of contribution of 4% of post tax pay (+1%
tax relief) and compelling employers to match this with a 3% contribution will,
if adopted, present small and medium sized businesses with a significant
financial challenge.

We continue to favour a voluntary approach over compulsion, not least because
many UK companies are competing across Europe against businesses from developing
European countries with a lower overall tax burden.

The costs inherent in establishing state run, central collection mechanisms
are often underestimated and hidden. In the UK we have a highly developed
private sector, capable of providing low cost, high volume solutions for
pensions administration and fund management through existing infrastructure.

We would urge the government to look at using existing structures, such as
stakeholder pensions, as the most effective use of resources. Administration
costs in the UK are highly competitive compared with overseas models on a like
for like basis. However, our main concerns arise from the exclusion of the cost
of advice from the ‘pensions’ decision.

If auto enrolment is used to enrol staff into pension schemes, the decision
as to whether to remain in or opt out must be considered against the background
of low earners who may be covered by state benefits anyway. For low earners
especially, the need to reduce debt will be a key priority.

Attitudes to timing and phasing of retirement will impact funding decisions.
Other assets such as property must be taken into account in the retirement
decision, as must consumers’ personal attitudes to risk.

For employees, there is a risk that the auto enrolment level could be seen as
‘adequate’ when, in fact, considerable additional contributions will be required
to take replacement rates beyond 50% of median earnings.

How will individuals put this decision in context? Who will assist with this?
These are important issues that will form a key part of the forthcoming debate.

Steve Folkard is head of pensions & savings policy at AXA

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