Memorandum submitted by the PEPs and ISAs
Managers' Association (PIMA)
Introduction
PIMA the leading trade body for tax incentivised
savings providers, on behalf of over 110 members and the millions
of consumers who hold tax-preferred savings schemes, would like
to recognise the importance of the efforts by the Treasury Select
Committee to better understand stakeholders' views regarding pensions
reform and specifically the costs and role of regulation arising
from the proposals for the National Pensions Savings Scheme (NPSS).
PIMA believes that successful pensions reform will be best achieved
through a collaborative process with industry, consumer groups,
independent bodies and other stakeholders.
PIMA applauds the work of the Pensions Commission.
The Commissioners and their team have produced an excellent report
that presents an exhaustive account of the state of long-term
savings in Britain. The detail and thinking around past experience,
current policy and likely trends give fresh life to the policy
debate around pensions reform and broader issues about long-term
savings and retirement.
PIMA is well-placed to make a serious contribution
to this debate. PIMA's members represent a diverse cross-section
of the retail financial services industry from banks and friendly
societies to asset managers to stockbrokers to insurance companies
and services providers. PIMA represents its members, and through
them, the millions of investors in tax-preferred schemes.
PIMA works with a wide range of Government departments,
the FSA, and private sector stakeholders to ensure that consumers
have the widest range of choices in their tax-preferred investment
vehicles. PIMA works on behalf of members and consumers to make
regulation of the UK's "flagship" savings schemes effective,
properly balancing protection and market efficiency.
At the behest of the Committee, PIMA would like
to offers its views on regulation and cost of NPSS. PIMA's members
have immense experience in managing thousands of savings schemes
and investment products. PIMA members are able and willing to
make available to the committee their first-hand knowledge of
operational issues and feasibility of implementing any new scheme.
Broadly speaking, PIMA is ambivalent about the creation of a new
NPSS scheme. In truth, much more thinking needs to be done. However,
as a general principle, PIMA believes that the wealth of experience
in the financial services sector in the UK can and should provide
the solution to long-term savings in the UK. Recreating that through
a Government scheme may only add further complexity to savings.
Cost
First it is worth noting that while cost is
an important factor in the accumulation of long-term savings,
to date it has had a tendency to play too large a role in the
debate. The real question is cost for what? Cost can only be compared
if the other factors are equal. If costs are really cheap, but
returns are lacklustre is the investor really better off? If costs
are high, but returns are spectacular, then does it matter that
costs were higher? This is a crucial question of the debate that
has been inadequately articulated in the wider dialogue on pensions
reform, the real issue is much more about risk versus reward,
the risk appetite and its understanding or comprehension by the
consumers.
However, PIMA does admit that cost is one important
consideration. Based on the conceptual shell provided in the Pensions
Commission's second report, PIMA believes that there is potential
for significant up-front costs in creating and implementing the
NPSS model. Obviously, there are a lot of details still yet to
be known about the NPSS and how it would function. As such, we
are hesitant to offer concrete figures to this end. There are
three important "costs" to contemplate as the debate
goes forward. Firstly, there is the cost of creation and implementation
of any Government-led NPSS solution. This cost of installing the
infrastructure by the Government would presumably be funded by
tax receipts. Secondly, there is the cost to the consumer, the
collector and the contributor of transactions related to any scheme.
Finally, there is the cost of advice which should be a consideration
to any scheme created.
As to cost of creation and implementation for
the Government, PIMA has little expertise in this area. However,
based on our experience, the expected cost of publicity, information
technology systems, and maintenance for a universal scheme would
be substantial—probably running into the tens or hundreds
of millions.
Related to this is the cost of transactions
for ongoing contributions. The feedback received from members
who currently conduct business in occupational pension schemes
suggests that the cost of collection from employers is significant
for the collector. Systems must be created, learnt and manned.
In addition, with any new scheme there will also be some (perhaps
even significant) business cost to employers to make such contributions
to any scheme, especially if it is compulsory. Again, this will
involve man-hours, expenditure on systems and significant internal
resource.
Finally, the cost of advice is nearly universally
recognised as one of the most costly parts of providing long-term
savings products. PIMA recognises that advice is not always required—in
there is a great diversity in how consumers buy ISAs and CTFs.
Some consumers feel comfortable with choosing their own investments
and purchasing them directly from a distributor or product provider.
These are generally the most financially savvy and financially
capable. However others seek, and quite frankly need, advice in
their long-term financial planning. PIMA is not satisfied that
the issues around cost of provision of advice have been adequately
addressed by the Pensions Commission or National Pensions Debate.
The Pensions Commission was half right—properly addressing
the issue entails "un-bundling" the cost of advice from
the costs associated with managing the underlying investment.
However, it does not solve the problem that many people need and
want advice on such important decisions with such significant
long-term implications. As such, offering a universal figure of
0.3% for everyone would seem to oversimplify what is a much more
complex problem.
PIMA sees the workplace as an important component
in encouraging long-term savings. However, many years of experience
and common sense lead it to believe that obligatory participation
by employers and employees may not actually result in a net gain
for Britons. Clearly, the employer contribution will not simply
appear from nowhere. As much as the Government and society at
large may wish otherwise, the implementation of an obligatory
scheme will lead some employers to simply offset contributions
to the NPSS against future earnings or benefits.
PIMA believes that the workplace of the future
will be one in which flexible benefits thrive. In order to stay
competitive, employers of all type will be required to give employees
the choice in how they are remunerated. That might be through
contributions to a savings vehicle such as an ISA or pension.
It might be through protection policies or employee share schemes.
Or it might be through additional salary or holidays. This will
allow individuals to meet their own needs as they see fit.
NPSS and Regulation
The issue of regulation of any pension scheme
offered by the Government is extremely complex. First it is worth
noting that current Government-sponsored investment products are
not regulated by the FSA. One can buy a cash ISA or bonds from
NS&I, while not being afforded the protection of FSA regulation.
Instead they are "backed by HM Treasury". In contrast,
many other investment products are regulated by the FSA. This
is worth noting not because of any suggestion on PIMA's part that
NS&I be regulated, rather because of the precedent it sets
for any NPSS scheme.
Based on the responses to the recent HM Treasury
consultation on eligibility to establish pension schemes and the
Government response, it seems likely that pensions will be regulated
by the FSA from April 2007. PIMA has been supportive of this move
on both philosophical and practical grounds. It believes that
this will greatly benefit the consumer by promoting greater competition
through enabling a wider number of market participants to offer
pension schemes. PIMA believes that this could include the Government
via NPSS should it choose to compete in the marketplace. However,
in the interest of a level playing field and fair competition,
that marketplace must be equitable to all players. As such, NPSS
should also be required to meet the same regulatory requirements
as other firms offering pension schemes. Only when all firms are
subject to the same standards can the consumer really make an
informed choice in a competitive market. To create a scheme where
one player enjoys different rules can only lead to market distortion
and confusion by those it is designed to benefit most—the
consumer. If the ideas underpinning NPSS are truly superior, let
the market make it a success.
Again, advice is a key issue. If NPSS is allowed
to operate on a different plane than the private sector, there
could be profound consequences. Compulsory pension contributions
may not always be the most financially sensible. Take one issue
which is very relevant to contemporary personal finance in Britain—debt.
In modern Britain, people have a vast array of financial predicaments.
Some have no savings and only debt, of the consumer and mortgage
varieties. Others have no debt and significant equity/sums saved
in ISAs, pensions or housing stock. However, most people have
a combination of both. In the case of those who have only debt
and no savings, compulsion to save for the long-term, instead
of near-term priority on repayment of debt may constitute mis-selling
and is almost certainly not financially sensible. Here is where
the stark inequity of different regulatory approaches becomes
apparent. Competent financial advisers selling private sector
savings would not and should not advise savings where guaranteed
returns would not outstrip the cost of servicing debts.
In summation, PIMA feels that it is broadly
in the interest of the consumer to have a single, overarching
regulatory framework for the conduct of business relating to and
promotion of all pension arrangements—including NPSS.
Building on Success
PIMA believes that there is a much simpler way
to promote long-term savings in the UK. The answer lies in simply
building upon what already exists, what is proven as successful
and what consumers like and use—the tax preferred wrapper.
Tax-preferred schemes are exceptionally popular
with the public. For example, over 55% of the working population
owns an ISA. Why? Mainly, because the concept is exceptionally
simple and it is clear that this is very attractive to the consumer.
Investments of a wide variety sit within a "wrapper"
which shields them from tax on capital gains and interest received.
In only six years after the introduction of
the ISA, nearly £190 billion has been invested. [34]In
addition PEPs still have £71 billion held in them. We can
expect the figures from the Child Trust Fund, which is based on
ISA philosophy, to reveal many billion more invested when figures
are published this summer.
ISAs vs. Pensions?
When thinking about ISAs in comparison to pensions,
it is useful to consider total funds invested to each. While there
is a much larger aggregate total subscribed to pensions, the statistics
show that in the past five years the ISA has been a much more
successful consumer savings product.
Compare the five years of contributions between
2000-05. According to the HMRC statistics, the aggregate total
of ISA subscriptions between tax years 2000-01 and 2004-05 is
roughly £141 billion. [35]That
compares with £282 billion paid into pensions (including
funded occupational, unfunded occupational and personal pensions
savings) in the calendar years between 2000-05. [36]However,
of that £282 billion, £184 billion are employer contributions.
As such, one may deduce that individuals' subscriptions to ISAs
were over 43% greater than contributions to pensions of all types
made by individuals/employees (employers cannot make direct contributions
to ISAs per HMRC regulations).
Thus, in like for like terms, contributions
to ISAs by individuals have been significantly greater than those
made into pensions regardless of type. However, comparing ISAs
to all types of pensions is a skewed comparison because of the
scale, complexity and variety of occupational pension provision
in Britain. Thus, it is perhaps more accurate in terms of perspective
to compare yearly ISA contributions to those made by individuals
into personal pensions schemes. Year-on-year, ISA subscriptions
are roughly double those made into private personal pensions schemes
by employers and individuals. Further when comparing like for
like—individuals' contributions to ISAs and private personal
pensions, contributions to ISAs are roughly 335% of those made
to private personal pension schemes. [37]
Additionally, all ISA contributions have been
taxed. This compares with pensions contributions which have tax
relief added to them at the marginal rate. Additionally, ISAs
have a maximum subscription per calendar year that is a fraction
of that which may be invested into a pension. Thus it is logical
to conclude that if ISA savers had the opportunity to gain tax
relief and had a significantly higher subscription limit; the
investment in ISAs would outstrip pension contributions by an
exponentially greater figure than is already the case.
It is therefore logical to conclude that ISA-style
schemes are much more attractive to the general public than pensions.
This is evidenced by consumers' own demand for them despite their
lack of tax incentives like those afforded to pensions.
A Gap in the Thinking
PIMA and its members were disappointed that
more attention wasn't paid to savings in ISAs and other tax-preferred
wrappers in the Pensions Commission's overall analysis. While
ISA savings were considered in the first Pensions Commission Report
(Challenges and Choices), they were not fully considered
in the Second Report (A New Pension Settlement for the Twenty-First
Century) nor were they offered as part of the solutions package
for reform.
However, PIMA supports reform on pensions because
it agrees with the broad conclusions of the Pensions Commission's
Challenges and Choices report about the state of pensions
savings in the UK. Millions of Britons are not saving enough for
their future to provide for themselves adequately in retirement.
If no further provision is made, many people will face their retirement
living on only the State Pension and other associated state benefits.
However, there is a great deal of evidence to suggest that better
can be done.
To that end, it is necessary to make long-term
and retirement savings better fit the lives people lead. The current
system is woefully outmoded by changes in lifestyle, career patterns,
life expectancy, and technology. In the words of the New Pension
Settlement for the Twenty-First Century the current pensions
arrangements and choices are simply "not fit for purpose".
Those who are not in regular work or have multiple jobs often
fall through the cracks. Those who shift from one employer to
another are often burdened with many pensions with small amounts
of contributions.
Pensions reform should ensure access to modern,
flexible, transparent, portable, and a cost-efficient means of
saving. Much of the debate recently has centred on cost. PIMA
and its members believe that an ISA-style retirement account offers
many additional attractions that make it suitable for today and
into the future.
Building on the ISA Success—The Savings
and Retirement Account (SaRA)
For the past two years, PIMA has advocated the
introduction of a retirement-specific savings wrapper entitled
the Savings and Retirement Account (SaRA). The SaRA would build
upon the success of the ISA. It would be a long-term account in
which funds accumulate towards retirement income provision. Like
the ISA and the Child Trust Fund (CTF), this scheme would be defined
as a wrapper and would hold funds of varying types chosen by the
investor. Permissible investments would be any FSA-qualifying
investment. Employers could pay funds into a SaRA, just like existing
pension arrangements.
The rules and regulations would be very similar
to those of the Child Trust Fund, but access to the funds would
be restricted until retirement and the scheme would operate under
pensions legislation and attract pension tax relief. The key differences
to most current pensions is that they would have the option of
operating without trustees but could rely on the use of nominees
to restrict the underlying beneficiaries access to the funds—this
will come into force on A day; the scheme will be regulated by
the FSA—they have stated that they will regulate personal
pensions from April 2007, and the pension provider rules should
be widened to increase competition—this has been the subject
of a recent consultation by the Treasury and will hopefully be
in place by or before April 2007.
Thus hopefully the legal framework for the SaRA
should be in place before 2007.
Why SaRA?
Funds would be portable—assigned to people,
not "employees". Thus if a person moves jobs, they would
keep the same SaRA account whether they have only one or fifty
jobs over the course of their life. This would prevent proliferation
of many small pension pots which is recognised to be a very serious
problem with the current system.
The SaRA is transparent. Investments can be
valued at any time.
The SaRA is simple. Just as over 16 million
people understand the ISA, the SaRA would be immediately comprehendible
by most prospective savers. Saving with the SaRA isn't hard. Get
the SaRA wrapper. Pay money in. Attract tax relief. Make choices
(advised or unadvised) on your investments.
Greater coverage for lower earners could easily
be achieved. The SaRA is ideal for those not well-served by the
classically defined "pensions industry" or through ever-dwindling
occupational pensions schemes. A single, simple product means
lower and middle earners would be equally well-placed for saving.
Additionally, since they have traditionally not saved in pension
products, there may be added incentives to add smaller amounts
and attract tax relief.
The SaRA empowers the consumer to make choices
about their investments and how to best achieve growth. They can
choose to amass greater funds through minimising cost of investment,
which was a major emphasis in the second Pensions Commission Report
and ultimately led to their recommendation of an NPSS. However,
other investors may choose to pay a higher price for what they
deem to be potentially better performing investments. The consumer
is empowered with the SaRA model in a way that they are not with
the NPSS model.
Flexibility is a necessity of modern life. The
SaRA would allow inflow of funds to stop and start at the will
of the account holder. Thus if funds need to be diverted elsewhere
for other needs, the integrity of the SaRA remains. It doesn't
lapse. It doesn't expire. Since the SaRA is not tied to the workplace,
career breaks for carers and parents have no effect either.
Costs are an important issue, because as has
been demonstrated in the Pensions Commissions' findings, higher
fees and charges can have both a detrimental effect on the decision
to save and can result in significantly less accumulation of funds.
The SaRA wrapper would ideally be available at no direct cost,
as are many ISAs.
The nature of the qualifying investments for
the SaRA would retard excessive charges. There has been much attention
paid to the annual management charges (AMC). There is every reason
to believe that the wide range of qualifying investments and providers
would create a competitive marketplace where charges would be
kept low. This is an issue that would need to be further explored
with individual providers, but on the surface, there isn't any
reason why providers could not provide special "SaRA-friendly"
AMCs. It is also anticipated that investment options would include
low risk "Stakeholder"-style funds as used in Child
Trust Funds and bond and money market funds.
Why is SaRA a favoured alternative to NPSS?
The SaRA is a market-based solution that would
allow consumers to choose from amongst many different providers
for their investments. That compares with the proposed NPSS whose
gatekeeper (HM Government) contracts mass volumes of funds to
wholesale markets. In this scenario, it is unlikely that market
providers would ever come into contact with the saver or know
his/her needs.
SaRA would undoubtedly give the consumer more
choice of investments while allowing greater accommodation of
different risk tolerances amongst investors than the NPSS scheme.
A market-based solution would allow innovation
and competition to thrive in the marketplace.
The SaRA builds on an existing context that
16 million Britons already have—the "ISA Experience".
There is no reason to "re-invent the wheel" when evidence
strongly suggests that there is already a solution people understand
and like.
The SaRA would enhance the financial capability
and education of savers. In contrast, the NPSS simply channels
the money through Government or some centralised clearing mechanism
that then passes it on to highly sophisticated institutional asset
managers.
Savers could easily know the value of their
investments. How would one value his/her NPSS savings?
Is the SaRA mutually exclusive with NPSS?
No. Given the open architecture design of the
SaRA, there is no reason why a person's NPSS account could not
be held within a SaRA, allowing them to hold other investments
as well. For instance, they may seek to invest via NPSS as they
look for savings accumulation through lower cost. In other investments,
they may be willing to pay higher costs because they think that
returns on investment represent good value for money paid.
The SaRA and NPSS, as it is proposed in the
Second Pensions Commission Report, have some important features
like flexibility and portability in common. The most redeeming
overall feature of the SaRA is its open architecture design—thus
there is no reason why they should be incompatible.
The Way Forward
The opportunity embodied in the SaRA concept
represents a quantum leap forward in thinking around long-term/pensions
savings. Throughout the first part of 2006, providers in many
different disciplines (including life companies, financial advisers,
fund supermarkets, fund managers, etc.) will be coming together
in a working group hosted by PIMA to scope the specific details
of products operating under this proposed scheme. We would warmly
welcome all, including representatives from the Department for
Work and Pensions, HM Treasury, and HM Revenue & Customs to
be participants in this process.
It is PIMA's view that for a number of reasons,
principally to do with benefits and taxation, pensions are not
the best solution for all consumers. PIMA has been working with
its members to design a tax incentivised savings scheme based
on the ISA philosophy with ISA tax rules which may be more appropriate
for this segment of society. In outline this scheme would be very
similar to the CTF, would start at age 18, the monies in the scheme
could only be accessed at age 55 when the scheme would convert
into one looking very similar to the existing ISA. This would
enable participants to withdraw funds post age 55, when required
and with no tax liability.
Further, in forthcoming pension reform legislation,
we encourage the Government to put savers first by allowing them
to save for retirement as many already do successfully in ISAs.
This can be best achieved through the introduction and promotion
of the SaRA by HM Government and the savings industry in mutual
cooperation.
March 2006
34 Projected figure based on past years' amounts invested
in Individual Savings Accounts, HMRC table 9.4. Back
35
2005 Budget Report. HM Treasury, p. 111. Back
36
"Private pensions contributions: updated estimates, 1996-2004."
Economic Trends 622. Office of National Statistics. September
2005, p. 31. This is based on the NQ5. Back
37
Extrapolated from Economic Trends 622 and the HMRC Table 9.4. Back
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