Memorandum submitted by Fidelity International
SUMMARY
1. Fidelity International believes that
a National Pension Savings Scheme (NPSS), as proposed by the Pensions
Commission, would have the potential to provide cost-effective,
meaningful retirement provision for its target population, ie
those who do not have access to a good work-based alternative.
2. The Commission acknowledged that there
is a great deal of good quality private-sector pension provision
already in existence but that it is increasingly under pressure.
Unless the NPSS is implemented and managed carefully its introduction
could threaten this existing provision still further.
3. If an NPSS is to be introduced broadly
along the lines envisaged in the Pensions Commission's report
there are certain features that would be key to the success both
of the NPSS itself as well as to existing work-based pensions:
— automatic enrolment through the workplace
together with an employer contribution;
— a clear distinction between the NPSS
and employer-sponsored arrangements;
— flexibility on the "target"
costs for running NPSS;
— limiting the contributions that can
be made to NPSS;
— simplified processes to enable easier
transfer from one defined contribution scheme to another.
POTENTIAL BENEFITS
OF AN
NPSS
4. As a low-cost retirement savings vehicle
with centralised contribution collection, the NPSS would have
the potential, if properly managed, to meet the needs of those
individuals who currently have no access to a good work-based
pension scheme—something that Stakeholder failed to do.
Automatic enrolment through the workplace would ensure that inertia
helped build up retirement savings. And with default enrolment,
there would be no need for advice or marketing, thus keeping costs
down. Limiting employer contributions to 3% of "relevant
earnings" would help employers manage the costs, especially
if the NPPS introduction were phased.
5. A cap on contributions to NPSS and suitable
banding for relevant earnings would be essential to help mitigate
the risk of adversely affecting current work-based schemes.
6. Limited, or even zero, investment choice
will keep costs low and help differentiate NPSS from good work-based
schemes. However, if the Government failed to strike the right
balance between the NPSS and the interests of workplace pension
schemes, it would risk harming the overall level of pension provision
making the NPSS merely an adjunct of the State pension system.
State pension provision would be the sole source of retirement
income for all but the wealthiest.
EMPLOYERS' WORK-BASED
SCHEMES
7. Existing work-based arrangements are
already providing excellent pensions for millions of people. It
would be essential that the eventual implementation of an NPSS
did nothing to weaken the incentive for employers to continue
making such provision available. For example, existing schemes
can more accurately cater for different workforce structures,
eg through tiered and matching contribution designs. The all-or-nothing
opt out from NPSS could facilitate entry to employer schemes at
a lower cost than proposed for NPSS, although controls would be
necessary to avoid abuse.
8. It is also in the Government's interest
to have good workplace schemes. If the NPSS were to crowd out
private schemes, it would in effect become a nationalised pension
scheme and an adjunct to state pension provision. With employers
simply collecting contributions and passing them on, NPSS could
come to be viewed as just another form of national insurance contributions.
Crucially, this could also lead to lower overall levels of individual
retirement saving.
OPTIMUM FRAMEWORK
9. If the goal is greater provision for
all, it may seem counter-intuitive to argue that a new NPSS be
kept clearly separate from existing arrangements. But, in Fidelity's
view, this would be essential to ensure that the NPSS served its
purpose of providing a minimum adequate level of pension support
for those who need it, when they need it while still encouraging
existing schemes to grow. Proper separation will mitigate the
risk of employers levelling down (although this will undoubtedly
happen to some degree—as some employers would have a fixed
budget for pension costs and if spread wider, would result in
the available budget being spread more thinly).
10. Where the employer's scheme meets the
conditions necessary to be deemed a "good" scheme, employees
should be automatically enrolled. Any employee who decided not
to join that scheme, however, could opt out. If they did so the
employer should be under no obligation to enrol them into the
NPSS as this would incur additional expenditure that would undermine
the viability of the employer's existing arrangements. With the
new three-month vesting provision for trust-based schemes (and
immediate vesting for contract-based schemes) there would be no
fear that individuals with short tenure of service would lose
out. Employees who joined their employer's scheme should not be
able to make additional contributions to the NPSS, or if they
were permitted to do so, this should be outside the employer's
payroll system.
11. The advantages of this would be that:
— it would produce benefits greater
than those available through NPSS for most employees, including
valuable death in service and ill-health benefits;
— it would keep down administration
costs for employers as they would only have to operate one payroll
deduction system;
— there would likely be less loss of
assets, as those employees who wanted to make additional voluntary
contributions (AVCs) would be likely to do so under these arrangements.
Hence, there would be greater mitigation of per capita cost increases
resulting from loss of scale;
— employees who did not want, or could
not afford to make any pension provision could opt out altogether;
— there would be no issues of advice.
12. The disadvantage would be that people
who opted out would be likely to have no pension coverage at all.
But this could also arise under other arrangements between the
NPSS and workplace schemes envisaged by the Pensions Commission.
Allowing concurrency of active membership would create greater
administrative burdens and lead to greater erosion of good work-based
schemes.
IMPLEMENTATION AND
INTEGRATION
13. Employer schemes should be judged against
the NPSS by a simple one-off test. Defined contribution schemes
would have to ensure that their design incorporated contribution
levels equal to or higher than those payable to NPSS. Contrary
to the Pensions Commission's proposals, however, this should not
be net of charges as this additional level of compliance
would render the test far more expensive to apply—particularly
as there would likely be variance of NPSS costs over time. Defined
benefit schemes could be subject to a one-off test of equivalence
(or better) similar to that currently applicable for contracting
out on the reference scheme basis—with actuarial consideration
of continuing ability to meet that test when scheme rules are
amended.
14. It should not be possible to have concurrent
membership of NPSS and workplace schemes as to do so would exacerbate
the risks of levelling down or forcing the closure of employer-run
schemes. Concurrent membership would also increase employer costs
by doubling payroll deduction costs and reducing the assets available
for employer schemes and thus increasing costs. It would also
lead to a "choice" for employees and thus the need for
advice—this would increase the costs and risks for all concerned.
Employer schemes could, in effect, be reduced to becoming a form
of Additional Voluntary Contribution (AVC) scheme—but with
greater costs and potentially lower returns. The situation could
also arise where individuals on similar conditions, working side-by-side,
would have very different retirement outcomes dependent on the
decisions they had made. Comparatively poor outcomes from being
in NPSS compared to a workplace scheme could also lead to feelings
of injustice and claims of mis-selling. Tax relief provisions
should also be the same between NPSS and workplace schemes in
order to avoid one undermining the other and exacerbating the
advice issues.
INVESTMENT ASPECTS
15. In order to keep down costs and maximise
benefits, the NPSS should offer a relatively limited range of
funds options. This would also ensure ease of understanding for
consumers. Good work-based schemes will be able to offer a wider
range of investment choices. This would help differentiate work-based
schemes from the NPSS.
COSTS
16. A 0.30% limit on costs might be achievable
over the longer term. However, if this limit were imposed inflexibly,
it could have adverse consequences for workplace schemes and the
overall level of pension provision. Asset levels, and thus, revenue
would be low at the outset and if the cost limit were set rigidly
at 0.30%, this might require higher contribution levels or widened
"relevant earnings" levels in order to come within the
limit. This could have the perverse effect of drawing assets away
from workplace schemes which would increase their costs and lower
returns. Ultimately, it could lead to the NPSS displacing good
workplace schemes or a levelling down of benefits. This, in turn,
could result in the NPSS being seen as a third tier state pension
and lead to lower retirement provision overall.
FRAGMENTATION
17. The current legislative framework for
allowing transfers of pensions is complex and requires simplification
to enable employees to transfer more easily from one defined contribution
pension scheme to another. A simplified process would be required
if providers were actively to promote transfers as a means of
consolidating funds. In principle, transfers between defined contribution
arrangements, particularly those meeting the conditions necessary
to qualify as a Stakeholder scheme, should be fast-tracked with
no need for the usual lengthy compliance requirements imposed
by the Financial Services Authority (FSA)—such an approach
would appear to be in line with the Government's desire to see
light-touch and proportionate regulation.
INFORMATION
18. All UK citizens should be given a centralised
combined pension forecast, although it is likely that the State
would need to obtain the necessary data from private pension providers
in order to do so. The information should be shown as a single
projected pension figure based on the individual's pension entitlement
from all sources including, as appropriate, the State pension
scheme and the NPSS. This should be the only information provided
on this statement although further detailed information should
be available on request.
19. Much of the Government's recent research
on communicating pension messages indicates that simplicity is
the key. It is well known that the morass of well-intentioned
disclosure material turns off all but a few pension scheme members
and hence detracts from the central message. A single, bold projected
pension figure (expressed in today's terms, but without copious,
qualifying footnotes explaining how this is derived) would be
simple for everyone. There is ample evidence that sophisticated
additional communication material and modellers are useful, but
only to those inclined to use them. Most individuals are put off
if deluged with such information at outset with the result that
rather than being able to make an informed decision they will
choose to do nothing.
CONCLUSION
20. Fidelity has made this submission as
a contribution to the debate on the assumption that an NPSS is
to be implemented. Although we believe that an NPSS would have
the potential to make a positive contribution to the broader pension
landscape, it would be important for the initial level of contribution
to be set high enough to achieve the objective of lifting contributors
out of means-tested benefits, whilst not undermining good corporate
schemes. If the Government were to get the balance wrong, it would
risk employers moving en masse to NPSS leading to the effective
nationalisation of corporate pensions and the perverse outcome
of a reduction of overall pension provision.
March 2006
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