Memorandum submitted by Norwich Union
EXEC SUMMARY
— NPSS must be delivered in a no-advice
regime or it will fail for the same reasons stakeholder pensions
and the Basic Advice regime failed.
— Additional regulation added cost
and complexity to the stakeholder structure, failing to address
consumer needs and making it uneconomic to deliver
— The existing regulatory framework
for a non-advice product provides sufficient consumer protection
for NPSS.
— In addition to operating without
advice, we would stress the need to remove as much regulation
and complexity from the NPSS as possible. Disclosure, pre-sale
literature, application forms and annual statements must be kept
as succinct and understandable as possible to build consumer engagement.
— We need to ensure the correct balance
between protection and simplicity
— Norwich Union believes that a national
pension scheme should have the following:
— Individual accounts that can move
with customers between employers and life stages.
— Minimum contribution of 8% from individuals,
government and employer (it must be explained this will be insufficient
to provide a comfortable retirement).
— A simple regulatory environment which
protects consumers but does not require them to receive advice.
— Lower charges of around 0.6% as a
result of auto enrolment and the removal of costs associated with
advice.
— There should be a manageable choice
of suppliers so individuals can confidently select an organisation
that can provide a secure, long-term home for their savings.
1. NORWICH UNION'S
PROPOSALS FOR
DELIVERING A
NPSS
1.1. We believe that individual engagement
with saving for retirement is essential to the long-term success
of the NPSS outlined by the Pensions Commission. We need to build
on people's acceptance of their need to prepare for retirement
by providing them with a simple, low-cost and effective means
of taking charge of their retirement futures. In our view, a single
national savings scheme offering no choice and likely to be characterised
as a second-rate form of saving will not build the necessary engagement.
Therefore we believe that the direction set out by the Pensions
Commission can best by followed by:
— auto-enrolment into a product similar
to existing stakeholder pensions, with suitability requirements
removed for people accessing the basic product;
— individuals empowered to choose from
a limited range of product providers;
— individuals empowered to build one
pension which stays with them as they move jobs or move in and
out of work; and
— the ability for those with higher
earnings and/or desire to choose from a broader range of investment
strategies to make a seamless transition to a more sophisticated
product.
2. FACTORS AFFECTING
THE OPERATIONAL
COSTS FOR
PENSION MEASURES
AND TIMING
OF ANY
GOVERNMENT OR
REGULATORY DECISIONS
RELATING TO
SUCH COSTS
2.1. An appropriate balance between consumer
choice, consumer protection and regulation must be achieved to
enable a National Pensions Savings Scheme to work as effectively
and efficiently as possible. Auto-enrolment into a non-advised
product will strip out most of the upfront cost associated with
stakeholder pensions. Coupled with higher take-up, improved persistency
and continued reductions in our cost base we believe that, depending
on detailed design issues, costs could be reduced to an annual
management charge (AMC) of around 0.6% p.a. However, it should
be remembered that even with auto-enrolment there is no guarantee
of a high take-up rate.
2.2. While we share the Pensions Commission's
desire to reduce costs and improve returns to out customers, there
is a need to set the arguments about costs in context. We do not
believe the 0.3% AMC proposed by the Pensions Commission is feasible,
and has yet to be achieved in Sweden, and the difference between
the 0.4-0.5% AMC which may be deliverable under a public sector
solution and the 0.6% AMC we believe we can deliver is negligible.
The costs of pensions matter, but we should not pretend that they
are the only, or even the most significant, determinant of the
success of the NPSS.
2.3. Costs can be affected by the following
factors and we would urge for any regulatory intervention in these
areas to be kept as simple as possible to reduce cost and ensure
it is easy for customers to understand and engage with NPSS.
(a) Advice and associated costs of
sales
2.4. In order to achieve the cost reductions
we would all like to see it is essential that NPSS products can
be delivered without advice and without a suitability assessment.
This, in turn, depends upon the NPSS being introduced in an environment
where long-term saving is clearly the right thing to do for the
vast majority of people. An employer contribution and reform to
the state pension system are, therefore, essential components
of an NPSS—ensuring that individuals can leverage additional
return from their own contribution and that they do not face the
prospect of losing means-tested benefits in retirement.
(b) Administration costs
2.5. Norwich Union proposes a model where
providers engage directly with consumers, which should incur lower
cost than going through employers to appoint and administer the
scheme. It will be imperative to provide clear, simple and easy
to understand information about NPSS and the choice of suppliers
and fund range so that people feel able to take informed decisions.
We feel product literature—such as brochures and application
forms—should be kept as simple as possible to encourage
consumer take up and keep costs low. An NPSS account should be
as easy to open as a savings account. Allowing customers to open,
monitor and administer their accounts online should also reduce
day to day running costs as it would reduce dependence on costly
personal support over the phone.
Timing of any decisions
2.6. With regard to the timing of any decisions
relating to costs, Norwich Union feels it will be impossible to
define exact running costs until firm proposals are in place for
the structure of the model, who should run it and what regulations
it would be subject to. Our views on costs will be developed further
following the publication of the White Paper on pensions reform
later in 2006. It is essential that the Government uses the opportunity
of the White Paper to provide a clear steer on the direction of
NPSS policy; in order to properly assess costs, Norwich Union
and other potential providers will need a clear steer on the likely
parameters of any NPSS and the future pensions environment, state
pensions in particular.
3. APPROACHES
TO THE
REGULATION OF
NPSS AND POSSIBLE
ROLE OF
FSA IN SUCH
REGULATION
3.1. The success of NPSS depends on achieving
the appropriate balance of consumer protection through a simple
regulatory regime, to increase consumer access and simplify the
enrolment process.
3.2. We feel it is appropriate for the FSA
to assume responsibility for regulating NPSS. In order to offer
pension products, firms have to be registered with the Pension
Regulator and comply with Revenue & Customs' legislation to
qualify for tax relief (this responsibility is moving to the FSA
later in 2006). We therefore feel the product would be subject
to appropriate monitoring and control under existing FSA regulation.
3.3. The NPSS cannot operate in a regulatory
vacuum. The aim of the NPSS is to improve pension provision among
non-savers, but an NPSS delivered within a separate regulatory
framework to other forms of pension provision could have the unintended
consequence of migrating existing savers away from their existing
provision. That is why we believe that the NPSS should be built
on the existing stakeholder pension framework and that we should
avoid creating unnecessary distinctions between NPSS and other
personal pension products. In Norwich Union's proposal, consumers
would be faced with just one pension product (outside of occupational
pensions), with a core, non-advised entry route supplemented by
additional advice and fund options for those savers who require
them.
3.4. There may also be a role for the FSA
in licensing a limited number of providers to deliver NPSS products.
Consumers will best be served by a vibrant, competitive market
with providers competing for customers on the basis of price,
service and trust. It is also crucial that people taking out a
pension in their twenties can be confident that the provider they
choose has the stability and strength to maintain a trusted relationship
with them right up to retirement. If the choices in the market
are too broad we risk overwhelming consumers, undermining confidence
and reducing personal engagement which will cause some to opt
out of choosing altogether. We believe that the consumer should
have a limited range of providers, perhaps 10-12, to choose from,
and the Government should consider issuing reviewable licenses
to deliver a NPSS product to a limited range of providers.
4. ROLES TO
BE PLAYED
BY THE
FSA AND TREASURY
IN TAKING
FORWARD MEASURES
ARISING FROM
PROPOSALS FOR
A NPSS
4.1. As already outlined we feel the FSA
should have overall regulatory responsibility for NPSS, with the
Treasury to introduce this regulation through consultation and
legislation. This should deliver a good level of appropriate consumer
protection whilst keeping it simple by operating within an existing
framework.
4.2. In addition to operating without advice,
we would stress the need to remove as much regulation and complexity
from the NPSS as possible. Disclosure, pre-sale literature, application
forms and annual statements must be kept as succinct and understandable
as possible to maintain consumer engagement.
4.3. NPSS will work best as part of a simple
private pensions market where customers can seamlessly move from
one basic NPSS product to one with additional optional features.
The regulations and requirements of the whole market should be
reviewed to ensure they complement the simplest possible regime
for NPSS.
4.4. We therefore feel the FSA should take
the opportunity of its disclosure review (scheduled for later
in 2006) and Conduct of Business review (coinciding with MiFID's
implementation in November 2007) to reduce the paperwork and information
customers are required to receive through mandatory communications
requirements.
4.5. It is crucial NPSS is introduced alongside
reform of the state pension and a review of the annuities system
and private pensions. We would therefore recommend the Treasury
leads a review of annuities and other forms of drawing down savings
to ensure funds built up in NPSS are treated as efficiently and
profitably as possible on retirement.
5. LESSONS FOR
DESIGN AND
IMPLEMENTATION OF
PENSION MEASURES
ARISING FROM
PROPOSALS FOR
NPSS FROM THE
REGULATION OF,
AND DECISIONS
ON CHARGE
CAPS FOR,
STAKEHOLDER PENSIONS
5.1. It is crucial for the success of NPSS
that an advice-free environment is preserved. Additional layers
of regulation introduced advice to stakeholder and the products
have failed to make a significant dent in the "savings gap"
by creating "new" saving.
5.2. Moving away from the "guided self
help" model originally proposed to basic advice introduced
the costs and complexity of advice for consumers to the stakeholder
model, and made it hard for advisers to make the scripts work.
5.3. This is particularly relevant where
an advice session moves from basic to full advice. The additional
scripts involved complicate the process and it could therefore
be argued stakeholder is sold in a more regulated environment
than other pensions products as it potentially operates in two
regimes.
5.4. It is therefore essential NPSS operates
within existing rules and allows people to access optional advice
at modest additional cost if they choose (subject to normal FSA
rules).
March 2006
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