Memorandum submitted by Royal London
— Reaction to the Pensions Commission's
Second report has concentrated on NPSS or alternatives to the
scheme. This is the wrong focus as fundamental reform of State
retirement provision must take place before any further product-based
initiatives.
— If NPSS—or any of the alternative
models—is introduced without reform to the State system
it will lead to significant risk of consumer detriment.
— Auto-enrolment and the lack of personal
advice will increase the risk of consumer detriment. The 3% employer's
contribution does not make NPSS—or any of the alternatives—"suitable"
for everyone.
— If a private sector savings scheme
is selected there are significant risks for providers as well
as consumers.
1. The recommendations of the Pensions Commission
must be implemented as a total package. Royal London is very concerned
that the debate so far has focussed on a single aspect of the
Commission's recommendations—the National Pensions Savings
Scheme (NPSS) and alternative proposals put forward by trade bodies.
2. Before even considering a centralised
retirement savings scheme Government must:
a. Introduce a Basic State Pension (BSP)
which provides an adequate income in retirement.
b. Fundamentally reform the current system
of means-tested benefits which continues to penalise (at a minimum
rate of 40p in the £) those who have saved—perhaps
inadequately—for their retirement.
3. The debate around the Pensions Commission
recommendations has largely bypassed reform to State provision
and focussed on yet another "product" solution and the
level of charges. This is unfortunate as it is a continuation
of the earlier debates on firstly, the charge cap on Stakeholder
Pensions and, secondly, "Sandler" products. Among those
invited to tender their own alternative specifications to NPSS,
ABI has come up with "Partnership Pensions" and NAPF
with "Supertrusts"—giant occupational schemes.
4. Imposing NPSS—and any of the rival
proposals—on the market, without reform of State provision
creates a very real risk of consumer detriment. The risk is especially
real as all the products under consideration involve auto-enrolment
of employees into the scheme, a process which takes place without
advice or consideration of the employee's personal circumstances.
5. The consumer detriment risks in Royal
London's view can be summarised as follows:
EMPLOYER COERCION
6. Central to the proposed product structures
currently on the table is the 3% mandatory employer contribution.
When an employee is "automatically enrolled" into NPSS
it triggers a compulsory 3% employer contribution.
7. There is, therefore, a clear incentive
for employers to persuade employees to opt-out of NPSS membership
with pay rises for those who opt out. We anticipate such practices
will be rife in smaller business with lower paid workers.
8. Consumers will need to be protected from
such unscrupulous actions that may be taken by employers. No such
protection exists in the advice free zone Lord Turner envisages.
THE "SUITABILITY"
MYTH
9. There is a significant leap of faith
taken by both Turner and the trade bodies responding to the Commission's
proposals. Central to their plans is the assertion that the compulsory
3% employer's contribution ensures the pension purchase is suitable.
This is demonstrably untrue as the following example shows:
10. Take a 57 year-old woman on £12,000
pa retiring at 65. We calculate her annual contribution to NPSS
(4% employee, 3% employer, 1% tax relief) would be £560pa.
11. The £5,000 pension pot accumulated
at age 65 would provide a pension of about £3.87 a week.
But, she will almost certainly lose it all to the means-test if
there isn't a radical overhaul of the way the state pension system
works. Clearly NPSS has been an unsuitable investment in spite
of the 3% employer contribution.
12. There are many, many others in similar
circumstances with sporadic patterns of earnings for whom NPSS
(or its rival schemes) will be inherently unsuitable. In stripping
out cost, the NPSS proposal envisages there will be no suitability
checks and no mechanism for re-dress for those consumers who discover
they would have been better off opting out in the first place.
THE "ADVICE
LEPER"
13. There will be those that chose to opt
out of NPSS either because they have been encouraged to do so
or because they do not want to contribute 4% of salary. In doing
so they will have removed themselves from the market for any regulated
financial product.
14. The only advice a regulated financial
adviser working for any firm can provide is "opt into NPSS
where you get 3% of salary from your employer for free".
The decision to opt out has effectively excluded people in this
category from mainstream financial services—and certainly
any form of advised pension planning. Financial advisers will
not want to have anything to do with NPSS opt-outs and advice
other than "join NPSS" is a mis-sale. (The fate of IFAs
who failed to spot opt-outs under the Pensions Review was a massive
financial penalty and they will not risk this a second time.
15. As well as the significant consumer
detriment risks we have also identified some provider risks:
PERSISTENCY RISK
16. We do not anticipate that the swathes
of employees auto-enrolled will remain there. Many, especially
those on low incomes, will seek to opt out as soon as they have
bills or unexpected expenses to pay. There are of course no penalties
for those exiting and so nothing to prevent early cessation of
contributions.
17. We envisage that persistency—and
therefore profitability—will be far worse than for the current
design of pension products. NPSS and its rivals would undermine
the capital base of providers who participate in the market (even
in the absence of upfront commissions).
LEVELLING DOWN
18. Many employers currently saddled with
the costs of running expensive occupational schemes will opt for
the lesser commitment of NPSS. In this way the flawed scheme will
drive out the good, undermining the occupational sector in the
UK.
ABOUT ROYAL
LONDON
Royal London was founded in 1861, initially
as a friendly society, and became a mutual life insurance company
in 1908. Royal London is one of the stronger life and pension
companies in the UK, with a current rating of 7/10 from Cazalet
Financial Consulting, and has a particularly strong track record
for with profits performance.
Scottish Life is a division of Royal London
and is the specialist pension business within the Group, providing
individual and group pensions. At the end of 2005 Scottish life
administered over 9,000 occupational pension scheme on behalf
of 113,000 members. Additionally Scottish Life administers over
5,000 group personal pension and group stakeholder schemes with
over 112,000 members. There are also over 209,000 Scottish Life
individual personal pensions in issue.
The Royal London Group has funds under management
of £28.9 billion. Group businesses serve over three million
customers and employ 2,885 people.
(Figures quoted are as at 31 December 2005.)
March 2006
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