APPENDIX 12
Memorandum submitted by Norwich Union
(PC 16)
SUMMARY
Norwich Union fully supports the Government's
desire to ensure that everyone has a decent and secure income
in retirement. We also acknowledge the work carried out by the
Department for Work and Pensions (DWP) towards ensuring that the
Pension Credit would reward saving.
In summary, we remain concerned that the incentive
to save is insufficient especially for those on moderate incomes.
In addition, the complexity of the Pension Credit and the uncertainty
surrounding its sustainability may cause advisers and pension
providers to shy away from targeting those on low and modest incomes,
for fear of criticism in the future. This would be to the detriment
of the Government's "Pension for All" objectives.
INTRODUCTION
As the UK's largest provider of life, pensions
and investment products and services, Norwich Union is pleased
to offer this submission to the House of Commons Select Committee
Inquiry.
We welcome the launch of the Pension Credit
which addresses the needs of today's pensioners and goes some
way towards removing the disincentives for consumers to save for
their retirement. In particular, we are pleased to note that the
notional rate of income assumed under the Minimum Income Guarantee
(MIG) has been replaced by a more realistic income assumption
and that the upper capital limit under MIG has also been abolished.
OUR MAIN
POINTS
(a) the role of the new Credit in the Government's
overall pension strategy
As we see it, the Government's overall strategy
is to
— address the needs of today's pensioners
through State Pensions (including the changes to state second-tier
pension provision) and the introduction of the Minimum Income
Guarantee, and
— ensure that pensioners of the future
who can save, do so through private provision such as stakeholder
pensions.
The Guarantee Credit element of the Pension
Credit will provide an effective safety net for those who cannot
afford to save and the Savings Credit will always provide at least
some incentive to save for those on low and modest incomes. Norwich
Union believes that, where possible, consumers should be encouraged
to provide for themselves in retirement. Whilst some of the disincentives
to save will have been removed by the introduction of the Pension
Credit, we do feel that there still needs to be a clearer incentive
for people to save. We submit two suggestions that aim to achieve
this objective:
(i) Introduce the Pension Credit with the
explicit understanding that the Guarantee Credit will be phased
out in due course. This would have the benefit of helping those
who have already saved and who are due to retire shortly, whilst
giving others the incentive to save for the future with some certainty
that they will get the benefit of their savings. The phasing out
could be introduced, for instance, in 2015 to have taken place
by 2020.
(ii) For individuals who have invested in
an approved stakeholder scheme, personal pension or occupational
pension, increase the Savings Credit of 60 pence for every pound
saved, to £1 to ensure that those individuals receive the
full benefit of their income from these sources.
(b) the method of up-rating the Pension Credit
and the long-term implications of the method chosen
The Government have stated that the level of
Guarantee Credit will rise in line with earnings during this parliament.
This is appropriate for the short term but we have concerns that
this could act as a disincentive to save if it were to continue
in the longer term. The real value of the Guarantee Credit could
outpace the real value of the Basic State Pension which increases
in line with RPI. The danger is that the number of people entitled
to the Guarantee Credit would increase steadily as the value of
the Basic State Pension decreases. We would like the Government
to make their longer term intentions clear, especially in the
light of independent projections highlighting the future costs
to Government. Of course, our suggestion in (a) (i) for the phasing
out of the Guarantee Credit would mitigate this problem. We would
also like clarification of the method of increasing thresholds
for the Savings Credit.
On the face of it, the £77 threshold for
the Savings Credit seems unduly harsh for those people whose total
income falls below this level. We would like further clarification
of how such people would be treated as it is our understanding
that they get no Savings Credit and this impacts on those with
broken working patterns. We believe that the Government should
at least confirm that they will be entitled to the Guarantee Credit.
(c) the effect of increased means-testing
on incentives to save
We feel that increased means-testing could be
seen as a conflicting message from Government. On the one hand
individuals are encouraged to save through Stakeholder Pensions
and on the other, State Provision is being increased through the
State Second Pension and MIG/Pension Credit. We would like the
Government to make their long-term plans clear ie whether the
trend towards increasing means-testing will be halted in the future
in order to encourage private provision.
(d) the ability of people on low and modest
incomes to make the correct decision regarding future pension
provision, and
(e) the impact of the Pension Credit on pensioner
poverty
Whilst the Pension Credit will ensure that it
nearly always pays to save, its operation is generally complex
and this creates uncertainty amongst consumers and advisers alike.
For consumers we would like to see the Decision Trees updated
as a priority to encourage saving and discourage any over-reliance
on means tested state benefits which are subject to change or
abolition by successive Governments.
If the complexity remains and advisers become
involved, any recommendation requires a careful analysis of the
individual's circumstances and likely circumstances at retirement.
This level of analysis and advice is inconsistent with the objectives
of stakeholder pensions and with the limited advice that can be
accommodated within the maximum 1 per cent charge cap. Those on
low and modest incomes are unlikely to be able to pay fees for
this advice.
The Pensions Credit clearly goes some way to
resolving the under-funding issues of the past and helps address
current pensioner poverty. In order to seek to eradicate pensioner
poverty in the future we believe that the importance of starting
to save now should be stressed to those with significant periods
to retirement. This should be done by updating of the Decision
Trees which should seek to make it clear that, due to the introduction
of the Pension Credit, "it will always pay to save".
In particular, we are concerned that the future
costs of the Pension Credit, which were highlighted by the recent
projections from the ABI, raise doubts about its sustainability.
Again, our proposal in (a) (i) for the phasing out of the Guarantee
Credit would go some way to overcoming this issue.
Finally, we believe that the Government should
indicate how the Pension Credit will work for those who are not
entitled to the full Basic State Pension.
(f) the implications of the Pension Credit
for the private pensions and insurance industries
Many of the points we have already raised about
the complexity of the Pension Credit affect Norwich Union's own
advisers in the same way as independent advisers. In particular,
our ability to distribute stakeholder pensions cost effectively.
Without clarity and greater incentives, distribution to groups
or through e-commerce and via direct offer advertisements, for
example, is problematic. Financial advisers will also have a responsibility
to consider the effect of The Pension Credit when providing ongoing
advice as part of the review process. Again, this may not be viable
within the maximum 1 per cent charge cap unless concerns over
the sustainability of the Pension Credit are addressed.
(g) the proposed methods for claiming /assessing
entitlement to the Pension Credit, including the frequency of
reassessment, and
(h) the likely levels of take up.
We welcome the Government's plans for The Pension
Service and the simpler and more proactive approach that will
be taken to encourage people to claim the Pension Credit. In particular
we support the replacement of the weekly means test with a new
five-year reassessment period which will make the operation of
the Pension Credit less intrusive. We think that this approach
will have a very positive effect on the levels of take up, which
as we understand from figures released by the DWP, for MIG, are
currently 25 per cent less than they could be.
11 January 2002
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