Memorandum submitted by B&CE (PC 16)
BACKGROUND
1.1 B&CE, formed in 1942, provides benefits
and financial services tailored to employers and employees in
the construction industry. It has a membership of 7,000 employers,
provides benefits for over 300,000 individuals and has over £1
billion in funds under management. B&CE has one of the largest
stakeholder pensions schemes in the UK, particularly targeting
lower to middle income earners.
THE B&CE VIEW
OF THE
CURRENT STATE
OF RETIREMENT
SAVINGS AND
B&CE'S EXPERIENCE
2.1 B&CE shares the prevailing view
that there is a severe and growing crisis in UK pension provision.[94]
2.2 We agree its root cause lies in the
shifting balance between those retired and those in work over
the next two decades, with fewer employed people having to fund
pensions for a larger number of retirees.
2.3 It is not though simply a function of
an ageing population. The inability of individuals to save sufficient
money for retirement, particularly amongst lower to middle income
groups, is a major contributory factor to the growing crisis.
2.4 The problem has been compounded by the
complexity of the current rules and regulations governing the
sale of pensions miss-trust engendered by the Maxwell saga and
other high profile pensions failures, and the payment of large
commissions to financial advisors of all types.
2.5 The problem is not insurmountable. Indeed,
B&CE's success in driving the take-up of stakeholder pensions
(SHP) within the construction industry provides a good model on
which to build.
2.6 We believe engendering a widespread
commitment to long-term savings amongst those on lower to moderate
incomes will, however, require:
— more extensive partnership between
employers and individuals;
— a shift in the prevailing sales "model"
in a commercial life market;
— government action to incentivise
employees and employers; and
— commitment to tackle the complexity
of the current rules and regulations governing the sale of pensions
that disproportionately impact on lower to moderate earners.
THE NEGATIVE
EFFECT OF
PENSION CREDIT
ON WOULD-BE
STAKEHOLDER SAVERS
3.1 The Government announced that, from
October 2003, pensioners would become eligible for a means tested
addition to their State pension, which would ensure that all single
pensioners without high incomes, would be entitled to claim at
least £105 per week and £160 per married couple. This
replaced the previous system of means tested benefits under the
Minimum Income Guarantee.
3.2 The new system was intended to reach
far more pensioners, because it was more generous to those without
significant extra sources of income, and would not penalise their
private savings £ for £, as under the old system. Under
this means tested Pension Credit (which well over half of pensioners
are currently entitled to, and well over three quarters will be
entitled to in the future) those who are entitled to it will effectively
lose at least 40% of their private pensions. If they had saved
enough to give them a private pension of £20 per week, they
would effectively be allowed to keep only a maximum of £12
of this, although anyone who does not have entitlement to full
basic state pension, will still be penalised by much more than
40% and could lose the entire £20 per week—or however
much they saved.
3.3 Nevertheless, the Government claims
this is a "reward for saving" because all of the private
income was previously lost £ for £. Of course, this
is only a "reward" relative to past policy, but future
retirees will see this as a penalty. It is this pension credit
policy, which has been extraordinarily damaging to the pension
contribution incentives of the group for whom stakeholder pensions
were designed.
THE BROADER
PROBLEMS OF
PENSIONS CREDIT
4.1 One of the biggest problems for pensions
at the moment is the increase in the prominence of means testing
in the State system. With the Pension Credit policy, well over
half of all pensioners are now entitled to means tested benefits,
and this proportion is expected to rise to over three quarters
by around 2040.
4.2 Evidence shows that Pension Credit is
considered a disincentive to save. Although the Government claims
that the Pension Credit "rewards" saving, this is not
the case. It just penalises saving less than the previous regime,
but, since so many more pensioners are entitled to Pension Credit,
it extends the disincentive effects of means testing to a much
larger proportion of the pensioner population. In practice, it
can be argued that pensions are no longer a "suitable"
product for the lower and middle-income earners, nor for older
workers with modest means. Financial advisers are loath to try
to sell pensions to those on average incomes. For the stakeholder
target group, it may be the case that they are being entirely
rational by not putting money into pensions. Under the means test,
at least 40% of any private income is taken away when calculating
the Pension Credit entitlement. For someone who received only
basic rate tax relief (22%), the risk of being penalised by 40%
on retirement is a major barrier to pension contributions.
4.3 The recently published Independent Pensions
Commission Report notes of the disincentive to save created by
the Pension Credit.[95]
The report states that continuation of the pensions credit would
lead to, "more people seeing a reduced benefit to their net
income from private savings." It further states, "Despite
the complexities however, there are clearly many people for whom
the mean-tested benefits do create a significant disincentive
to save individually: and these will tend to be people most likely
to gain the benefit of the NI efficiencies of employers' contributions."[96]
KEY EVIDENTIAL
SUPPORT
5.1 These arguments are borne out by empirical
data collected by B&CE in nationwide tracking surveys of employees
by Brahm Research undertaken in April and September 2004. Where
Pension Credit was explained to respondents, two in three (61%)
immediately recognised that the Pension Credit penalises those
who proactively take measures for their retirement. When different
respondents were again asked in September 2004 if there was a
disincentive to save created by means testing, nearly three in
four (75%) responded in the affirmative. This demonstrates, that
by and large, the public perceives the Pension Credit as being
a strong disincentive towards personal saving.
CONCLUSION
6.1 Pension Credit creates a disincentive
to save. Penalties of up to 40% on private savings do not encourage
people to provide for themselves. This especially affects those
in the lower income brackets-the very people at whom stakeholder
pensions are targeted. The majority of those in the construction
industry could make useful advantage of a savings vehicle like
stakeholder pensions and because of this B&CE has made these
a core element of its business practice. However, given the widespread
understanding by employees of the disincentives to private savings
in stakeholder pensions, B&CE is at loss to aggressively promote
them to people who will be penalised by participating.
6.2 Furthermore, there is a near consensus
that government policy is not joined up in mandating that employers
establish stakeholder pensions to thereby encourage private savings
amongst lower income earners while on the other hand offering
a Pension Credit that ensures participation in such a private
savings scheme will penalise them later. Across the financial
services community and now clearly from the Pensions Commission,
there is a consensus forming that means testing in its current
format cannot continue without seriously detrimental consequences
towards personal saving. B&CE maintains and supports that
view.
B&CE
October 2004
94 Evidence submitted to the Treasury Select Committee
in their Enquiry on Restoring Confidence in Long-Term Savings,
House of Commons, published in 26 February 2004. Publication
HC 275, EV 70. Back
95
"Pensions: Challenges and Choices", The Independent
Pensions Commission, Adair Turner, Chairman, published 12 October
2004, TSO, p. 226. Back
96
Ibid, p. 231. Back
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