Examination of Witness (Questions 186-199)
LORD TURNER
OF ECCHINSWELL
3 MAY 2006
Lord Turner of Ecchinswell: Yes.
Lord Turner, Chairman of the Pensions Commission.
Q186 Chairman: Are you generally
satisfied with the reception for the Pensions Commission proposals
for a National Pension Savings Scheme and for the extent of support
for some of the main elements of the proposal?
Lord Turner of Ecchinswell: The
brief answer is yes. We believe that there has been very considerable
across-the-board support for the general principles of a National
Pension Savings Scheme and in particular for two key elements:
one, the principle of automatic enrolment rather than going with
either full compulsion or leaving it to entire voluntarism (automatic
enrolment but with the right to opt out) as the appropriate way
forward, and, secondly, very broad support for the idea that we
have to find a way of enabling everybody, not just people in large
companies and people of high income, to save for a pension at
low administration costs so that they get to keep the vast majority
of their pension. That is reflected in the fact that, whereas
a year ago I think there were people who believed there was a
real possibility that we would suggest compulsion and automatic
enrolment into existing stakeholder accounts charging 1.3%, the
range of debate between the different groups which are talking
about the NPSS or alternatives is 0.3% to 0.6%. So we are very
glad that we have shifted the terms of the debate. There have
been completely predictable and legitimate concerns from different
interest groups, which we anticipated, from the Confederation
of British Industry and other industry groups: chambers of commerce,
the Federation of Small Businesses, which are concerned about
the 3% contingent compulsion in varying degrees of opposition
(not all groups are against that but some are), and from the Association
of British Insurers who want to be able to have their brands visible
and to play a role in the detailed distribution margin of the
NPSS, but those are completely legitimate arguments about detail.
Overall we are very pleased with the overall reception and the
support for the principles.
Q187 Chairman: When I was speaking
to the EEF last week, and they have submitted a paper to us, they
were recommending compulsion.
Lord Turner of Ecchinswell: Yes.
The EEF, among the employer groups, have always been the ones
who are not only not concerned about our contingent compulsion
on employers, compulsion if people choose to stay enrolled, but
have always been in favour of a form of straightforward compulsion
on employers combined with straightforward compulsion on employees.
That has always been their point of view but I think they recognise
that they are in a minority camp on that and therefore they have
been broadly supportive of our proposed way forward as something
which at least is heading in the direction that they want.
Q188 Chairman: Given this background,
do you think the Government should proceed with proposals for
an NPSS if it cannot commit to the employer contribution through
auto-enrolment?
Lord Turner of Ecchinswell: I
think that the employer compulsion element is a key part of the
overall architecture, as indeed are some changes and improvements
to the state pension system. One of the crucial features which
is required to get down the cost of running pensions is to move
to a model where we no longer need to have the expensive regulated
individual advice interview. That is what is really adding cost
to the present form of distribution of pensions, and all the proposals
for the NPSS or the alternatives to the NPSS which are put forward
by ourselves, the NAPF, the ABI, propose a non-individual advice
based system. In order for the Government safely to automatically
enrol people in that and to use the power of inertia for that
we need to have a high confidence that for the vast majority of
people this will clearly be a high value investment opportunity.
We cannot have a situation where people save, having been strongly
encouraged to do so by the Government, but then feel they have
had a poor deal, and there are therefore two bits of the architecture
which are important, one of which is reducing the degree of means
testing in the state system so that once people are in this they
get to keep the majority of what they have put in, but the other
is the contingent compulsion on the employer. What it enables
us to say to the employee is that, when they put in their 5%,
if they stay enrolled, of that 5% 1% is effectively paid for by
tax relief, so they are putting in 4% and there is a 3% employer
match, so to the individual it looks like four plus four—they
put in £100 and £200 ends up in their account. We believe
that is crucial to the success and to high participation rates,
so we would be wary of dropping that contingent compulsion on
employers.
Q189 Chairman: The Treasury and DWP
have told us that they are considering a further model based on
personal accounts for all those without an "adequate"
employer scheme with a single clearing house but multiple providers.
What do you see as the main strengths and weaknesses of this further
model?
Lord Turner of Ecchinswell: I
have not gone through with the DWP whether there is a model which
is intermediate between the model that we propose and the Association
of British Insurers' model. There may be a way of using a clearing
house to smooth somewhat the process of allocation of people to
accounts, but the core choice between the model that we have proposed
and the ABI model (the NAPF model is at a bit of a tangent to
this choice) is whether individuals hold their account with one
central system and access the fund management industry through
their stated choices at wholesale level so that the money goes
into the private system at wholesale level with the Government
acting as a bulk buyer, or whether they end up with accounts at
individual insurance companies. The disadvantage of ending up
at individual insurance companies is that it is bound to add some
cost to the system, and I think the ABI accepts that. They have
suggested that perhaps we were a bit optimistic in suggesting
that our costs could be 30 basis points. They have suggested that
maybe our costs would be 45 basis points but their own costings
suggest that their model would be more expensive than their estimate
of our model. Why is that extra cost there? That extra cost is
there because the moment you have a variety of different providers
at which people hold their accounts, you will have some degree
of movement between those providers and every time we add churn
to this system, people moving from one provider to another, we
add cost. That is a key reason why the existing distribution system
is so costly. There is an awful lot of churn between insurance
companies which is not actually adding any new savings to the
system. It is the same savings moving around the place, and the
only way to get round that is to end up with people having an
account at one central organisation which they keep for the whole
of their life. The other concern we have with the multiple provider
model, and this relates both to the ABI model and the NAPF model,
is that people would either have a choice between providers made
for them by their employers or, in the absence of the employer
expressing a choice between providers, would be allocated to the
different providers by what is called "the carousel",
some automatic mechanism. We have a concern that, given that with
multiple providers there would almost certainly be some variety
of performance over time, 20 years later you could get criticism
of the Government for having set up an automatic allocation process
which in some cases had allocated people to the less successful
companies. This relates to the whole issue of risks involved for
Government in encouraging people to save but we actually think
the multi-provider models are more risky than the single provider
model that we propose. However, the essence of our concern with
the ABI proposals is that they will increase the costs somewhat
and we have not seen a clear specification of what extra customer
value is being delivered in return for another 0.15% of administration
costs.
Q190 Chairman: We have received evidence
on that, and that is a big issue in this report in terms of cost.
Last week Ned Cazalet told the committee that the current commission
model was lunatic and fundamentally flawed, and Trevor Matthews
of Standard Life, as I mentioned, has said that the basic model
is flawed, but the ABI have claimed that the commission incentives
are all removed in their proposals for NPSS. I think they are
doing better than Tommy Cooper—"just like that",
it is gone, so I just cannot understand that.
Lord Turner of Ecchinswell: Sorry;
can you say that again please, the ABI's proposal?
Q191 Chairman: They claim that all
commission-based elements are eliminated in their model.
Lord Turner of Ecchinswell: Let
us return to the fundamental truth that between the models now
before us there is more commonality than difference. They are
all, as it were, closer to each other than they are to the existing
distribution system, and that is true both in the nature of the
design and in the nature of the costs, so we are now in a debating
range between 0.3% and 0.6% versus current charges for stakeholder
of 1% to 1.5%, perhaps 1.3% on average, so there is a degree of
commonality. What the ABI are trying to do is eliminate the commission-based
salesmen and, let us be clear, that is what all the models have
in common. That is where a lot of the cost is coming from. It
is not coming in the central computers and the account maintenance
of the insurance company. It is in the very large amounts of commission
which are paid to IFAs, so I think I would agree with them that
their model, like our model, is largely, and indeed ideally, entirely
eliminating from this process the need for an independent financial
adviser to do an expensive regulated interview. That is why under
their model they can get the costs down, and they believe profitably
down, from the 1.3% that they charge at the moment to, say, 0.6%.
I think that is a common feature and I think it is an achievable
feature under all of the models.
Q192 Chairman: Do you think 0.6%
would be acceptable?
Lord Turner of Ecchinswell: I
think it is less desirable than 0.3% but better than 1.3%. As
I said earlier, we feel pretty good that we have shifted the whole
range of the debate and I think therefore that whatever model
the Government goes forward with we will have a mechanism for
providing to people of average means a better value form of savings
than they have ever had before, but the point is that unless you
can see extra customer value for higher cost, even 0.3% to 0.6%,
why would you not go with the lowest cost route?
Q193 Chairman: But you are also very
experienced and aware that when you get estimates sometimes they
can spiral out of control after a year or two. People get back
and say, "It cannot be done".
Lord Turner of Ecchinswell: That
is obviously right and that is why we have described the 0.3%
that we have suggested as a benchmark to aim at. I think we are
more confident about the relative ranking of the different proposals
in terms of cost than we are about any precise figure. What I
mean by that is that there is a set of logical reasons why the
costs will increase as we have a greater number of providers.
That indeed is clearly illustrated in the NAPF proposal. The NAPF
proposal is slightly different from the ABI proposal. It is multiple,
mutual, non-profit providers, but if you look at the NAPF costings
they show that the costs reduce as they reduce the number of trusts.
They talk about a ten-trust model having costs of about 45 basis
points and a one-trust model having costs of about 33 basis points,
which is quite interesting because a one-trust model is diminishingly
different from the NPSS proposal. The smaller the number of trusts
you have the closer you get to our proposal and they ended up
with a figure for the costs which was remarkably close to ours.
Can we swear we will do it for 30, 35, 40? No, not necessarily,
but what I am confident of is that as we multiply the number of
providers in the system we are likely to add costs, so the relativity
I think is fairly clear.
Chairman: The FSA also made that clear
to us in the previous evidence session.
Q194 John Thurso: Lord Turner, I
am interested in who you feel the NPSS is primarily targeted at,
but before I ask you specifically about that I wonder if I could
ask you a question about the overall objective. Would you agree
that the overall objective of our pension policy should be, even
though ultimately the objective is unattainable, that all those
in work should in the course of their working life provide for
their own retirement?
Lord Turner of Ecchinswell: I
would slightly adjust that. We believe that the core of the UK
pension system should have two elements. One is a state pension
system which, for everybody who makes some sort of contribution
to society (under the way that the DWP is likely to go, through
working or through caring) at least keeps people out of poverty
in retirement. That is a state pension system, a pay-as-you-go
system, a national insurance system. We have proposals to make
sure that objective is achieved, but that would only be to keep
people out of poverty in retirement because, let us be clear,
our proposals for the state pension, whatever the debates about
affordability, would still leave the UK with one of the meanest
and most basic state pension systems in the OECD. That should
be, I think, a state system. All rich countries have a base load
of a state pay-as-you-go system. On top of that I think the objective
is to make sure that people have the opportunity either themselves
or through their employer to save for a pension and strong encouragement
to do so but ultimately the right to make their own decisions
on whether they do it or not. We have designed the role of the
state there as encouragement and enabling. To answer your first
question, on whom are we mainly focused in that NPSS, I think
that is clearly implied in figure 3 of our final report which
sets out the percentage of people who are not contributing to
anything beyond the state pension system and therefore who are
not on track to get anything other than the absolute basic. The
proportion of those people in the private sector has gone up,
as you can see on page 13, from about 42% to 56% just in the course
of the last 10 years. The key concern is not the public sector
nor the very largest companies, which will tend to provide pensions,
but the broad swathe of people of average earnings working for
small and medium enterprises where it is very costly to get to
them on an individual basis and where employers on the whole are
retreating from their historic role in pension provision. If I
had to have one archetype that we are thinking about, it is the
person on average earnings, £22,000 a year, working for a
20- or 50-man firm. It is about how we get savings opportunities
to that person. That is the middle of the range that we are most
worried about.
Q195 John Thurso: But in reality,
given that the big companies, the public sector, et cetera,
which is probably 50% of the workforce, you are not concerned
about because they are in good pension schemes, and that you are
targeted at the average earnings, what actually is going to be
the case is that in reality it will be predominantly targeted
at those below average earnings.
Lord Turner of Ecchinswell: I
think it will be targeted at those on average earnings, a bit
above and a bit below. I think it will be targeted at the broad
swathe of middle Britain. There is a level of income above which
I think society has to say that if people fail to make provision
for themselves that is their concern. There is a level of income
below which, let us be clear, pensions are provided by the state
and we are really not going to be able to get people into savings
because they do not have enough money to save. But there is a
big swathe of income—let us put it at £10,000 to £30,000—which
covers the vast majority of the income distribution, and I think
people would describe it as the lower middle, middle and just
above middle incomes, where we have had an increasing number of
those people not making any provision on top of the state pension
while the state simultaneously is planning to do less for them.
That is the core problem that we are trying to fix.
Q196 John Thurso: Why do you think
it right that the NPSS should have the characteristics of a pension
product rather than, say, a more flexible savings product that
might be available in certain circumstances prior to retirement?
Lord Turner of Ecchinswell: That
is an interesting debate and I think it would be possible to consider
whether there might be variants which would allow some access.
On the whole we have not gone down that road for the following
reason. We think it is important to encourage people to make at
least a base load of provision for retirement. We know that one
of the problems that we are trying to overcome is people's inertia
in relation to entering long term savings and, as it were, their
myopia, their difficulty in looking far ahead and anticipating
their long-run requirements. I think the trouble, if we allow
greater access, is that it will be accessed earlier on and we
will still have the problem of a lot of people heading into retirement
with inadequate pension income. So, given the scale of what we
have proposed, where the minimum amount is not huge and is not
what is required to get people up to two-thirds; it is just an
absolute minimum base load of income replacement—I think
it is reasonable to suggest that that should be locked away and
available to support people in retirement. Let us remember that
the Government gives significant tax relief for this form of savings
and the reason why it gives tax relief for this form of savings
is to encourage people to do something they would not otherwise
do, which is to make adequate provision for retirement and therefore
not to be dependent entirely on the state. I think it is reasonable,
given that approach, that we are encouraging people to commit
to long term savings which are not accessible both during working
life. And we are proposing that the existing annuitisation rules
should exist in retirement, because that is the other area where
the issue of restriction on access versus immediate access comes
in. You can argue it either way but we believe it is important
to try and make sure that people have made adequate provision
that turns into pension income.
Q197 John Thurso: Would you favour
non-earners being able to access the scheme?
Lord Turner of Ecchinswell: We
would favour non-earners being able to continue to make contributions
to the scheme, and indeed we did say that at one point. The automatic
enrolment process essentially works for employees. It is really
impossible to do anything meaningfully called automatic enrolment
either for self-employed or for non-employed, but certainly we
anticipate that, once somebody has been enrolled in the scheme
as an employee, if they then leave the workforce they should be
able to keep contributing and there is no reason whatsoever why
somebody who has not become an employee should not contribute
as well. I think they will be small in number. Frankly, the nature
of the modern workforce is that the vast majority of people in
their twenties become either employees or self-employed and most
people outside the workforce are people who later in life, are
taking breaks to bring up families but they should certainly,
if they want to, be able to continue to make contributions to
the scheme.
Q198 John Thurso: If personal accounts
did develop do you think there is a possibility the Government
might wish to make separate contributions as a way of supporting
those drawing near to retirement?
Lord Turner of Ecchinswell: What
we have done here is try to have a system which has clarity of
what the Government is doing and what the Government is not doing,
that in relation to the basic state pension and state second pension,
the state pension systems, the Government is using taxation power
and providing a pay-as-you-go system, and that system is redistributive.
The pay-as-you-go system is redistributive. It pursues the Government's
legitimate redistributive aims. But on the other side, the savings
side, we are trying to get the idea that this is a property right,
that you own what you put in and that if you die before retirement
it belongs to you. I think we then have to be a little bit careful
about too much muddying of that principle but that does not necessarily
mean that you could not imagine some categories of government
contribution. The thing that we did not mention, for instance,
is, say, government contributions in relation to caring responsibilities.
We have a credit system for government contributions to what effectively
are government contributions to the state pension system. We have
not envisaged them for the NPSS. In Sweden however, you do have
forms of government contribution to the notional defined contribution
element of the system, the earnings related element of the system.
I do not think one should necessarily exclude them. The principle
which is absolutely clear though, is that if the Government ever
decided for any social purpose to start paying groups of people's
contributions to the scheme, it must pay it in real, up-front
money, ie, this must be a funded scheme, not something where you
are saying, "I grant you a set of rights to receive money
out of it at a later stage". You need clarity that we have
a pay-as-you-go scheme on one side but that this is a funded,
real money scheme.
Q199 Mr Fallon: In your report, Lord
Turner, you said that what was essential to the success and credibility
of the NPSS was a policy to prevent the future spread of means
testing. In a reply this morning to the Chairman you said it was
essential that means testing be reduced. Which is it?
Lord Turner of Ecchinswell: How
long is a piece of string here? The proposals that we put forward
take a system which on auto-pilot would have taken the percentage
of people subject to means testing up from about 40% of all pensioners
to something like 75%, and would mean that under our proposals
that would fall from about 40% to about 30% over the course of
the next 45 years, so it would put it on a trajectory where it
is going down rather than going up. I think probably I did not
select my words carefully earlier. We would like it to reduce
rather than simply not grow but, given the starting point—which
is that on a no-change policy it is going to go from 40 to 75—the
first step is to make sure it does not grow, but ideally it should
go down further than that.
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