Conclusions and recommendations
Recent trends and future proposals
1. One
of the starting points for consideration of proposals by the Pensions
Commission and of rival proposals must be the realisation that
Stakeholder pensions have not been successful in halting the decline
of non-State pension provision among middle earners. Indeed, a
combination of sales approaches, commission incentives, regulatory
requirements and decisions about the charge cap have created a
position in which Stakeholder pensions are seen as uneconomic
to both providers and potential customers among the original target
market of middle income earners. The lessons from this process
must be learned in taking forward proposals arising from the work
of the Pensions Commission. We have sought to draw out these lessons
in our ensuing conclusions and recommendations. (Paragraph 21)
The Commission's proposals and other options
2. The
Pensions Commission is to be congratulated for bringing about
a broad consensus in favour of auto-enrolment as the basis for
securing a major advance in the level of private pension saving
among middle earners. A move to auto-enrolment is an essential
precondition if the NPSS or any rival option is to be implemented.
(Paragraph 33)
The suitability hurdle
3. The
compulsory matching employer contribution is an integral element
of the NPSS and of the rival options. If there were to be no such
contributions, the FSA's evidence indicates that it is unlikely
that participation in the proposed scheme or schemes could be
provided for without some regulated advice. With the increased
costs consequent upon the need for such advice and diminishing
contributions overall, it appears open to question whether a new
scheme or schemes without such contributions would represent a
step-change from Stakeholder pensions. (Paragraph 40)
4. The successful
delivery of a new pension saving vehicle suitable for the vast
majority of those eligible to contribute and thus not requiring
regulated sales advice is contingent upon expectations about the
extent and future course of means-testing for pensioners. These
expectations are dependent not only on announcements expected
in the Pensions White Paper, but also on the ability of present
and future Governments to establish a policy framework based on
a broad political consensus, together with accompanying forecasts
on those eligible for means-testing, which deserve and attract
the confidence of the public. (Paragraph 49)
5. It is of vital
importance not only that the Government establishes a long-term
coherent approach to policy on private and public pension provision
and communicates effectively with the FSA in relation to the FSA's
regulatory requirements, but also that the Government continues
to provide leadership and support to ensure that a regulatory
position on suitability in relation to the NPSS or a rival option,
once arrived at by the FSA, proves sustainable in the long-term.
(Paragraph 50)
6. We recommend that
the Government give consideration at an early stage in implementation
of an NPSS or any comparable measure to the design and availability
of generic advice to those considering participation in the scheme
as well as to scheme members. It may well be that the requirement
for generic advice in this context will need to be met as part
of wider endeavours to improve the quality of generic financial
advice that we are considering during our current inquiry into
financial inclusion. (Paragraph 51)
The challenges of implementation
7. One
of the keys to the success of the NPSS or an alternative that
is implemented is the minimisation of the need for regulation,
because regulation entails additional costs. The NPSS and the
NAPF model remove the element of employee choice about a provider,
and thus the possibility that such a choice may have regulatory
implications. The ABI model introduces consumer choice. From the
evidence we received, not least from the FSA, it seems likely
that such choice will create additional regulatory requirements
which may in turn affect the overall costs of any scheme based
on that model. This places an additional onus on the ABI to provide
convincing evidence that provider competition will serve to drive
down costs. (Paragraph 59)
8. The availability
of investment choices which are clearly signposted and accompanied
by appropriate information about risk and reward is highly desirable
and catered for under the proposed design of the NPSS. Nevertheless,
much evidence suggests that most members will remain in the default
fund. The design of the range of funds, especially the default
fund, and the quality of asset management of the funds, would
be crucial to the success of the NPSS. We expect the case for
independent scrutiny, especially of the default fund, to be one
of the issues to be considered during parliamentary scrutiny of
the measures arising from the White Paper. (Paragraph 63)
9. If the Government
sets out the detail of governance arrangements for a single provider
of pensions and funds within a single scheme, based on the proposals
of the Pensions Commission, it will be important for the Government
to clarify at an early stage the likely responsibilities of the
FSA for prudential regulation in relation to the provider and
funds within a single scheme. The Committee endorses the recommendation
of the Pensions Commission that the governance should secure an
institution which is clearly separate from direct government influence
and which is also, in the words of the Commission "clearly
public and non profit-making". (Paragraph 64)
10. There is a possibility
of effective public sector purchase of relevant administrative
services from the private sector, provided that the purchasers
on behalf of the NPSS or any similar national scheme have the
relevant skills, whether acquired in the public or private sectors.
It is important that overall administrative costs are minimised
and that an appropriate balance of risk between public and private
sector is achieved. (Paragraph 68)
11. In the event that
the Government proposes a model for private pension provision
based on the NPSS, we recommend that the Government, in its response
to this Report, set out the matters that will need to be considered
before a final decision is reached on collection systems. (Paragraph
69)
12. We welcome the
early indications from the FSA that it will be alert to the possibility
of mis-selling within the context of transfers in and out of the
NPSS. It is essential that information provided to members and
potential member of any new scheme includes clear guidance on
circumstances where it might and might not be appropriate to transfer
in or out of the scheme. (Paragraph 71)
13. Experience of
Stakeholder pensions indicates that market operators may exert
pressure for any charge cap to be increased and may tend to serve
the most profitable parts of a market, not those most in need.
(Paragraph 75)
14. It is of crucial
importance to the success of the NPSS and the overall trend of
private pension savings that the Annual Management Charge is as
low as possible and moves in a downward direction. An independent
Board of the NPSS would have every incentive to see charges low
and falling, as would the trustees of a Super Trust. (Paragraph
76)
15. We agree with
Lord Turner that the higher social priority in this area is to
promote additional pension provision for those who currently lack
it. Nevertheless, we consider that the market impact of a new
scheme, both prior to implementation and following implementation,
merits further study and we recommend that the Government give
further consideration to these issues at an early stage. We also
recommend that the Government consider further measures to enhance
public understanding of the long-term financial value of occupational
pension schemes. (Paragraph 79)
Conclusion: the potential of a new savings model
16. There
is a great and unique opportunity to reverse the decline in private
pension provision and restore confidence in long-term savings.
For this opportunity to be seized, there needs to be an integrated
approach in which three preconditions are met. The first precondition
is that the correct balance is struck between the role of the
State in securing and promoting a new pension savings product
and the sense of individual ownership. The second precondition
is that the new product maintains the simplicity and near-universal
suitability proposed by the Pensions Commission to minimise cost
and the need for regulation. The third precondition is that reform
of private pension saving takes place in tandem with a new direction
in the State pension system. (Paragraph 81)
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