Appendix: Government response |
The Government notes the conclusions of the Treasury
Committee's Report on The design of a National Pension Savings
The Government welcomes the Treasury Committee's
report on the design of a National Pension Savings Scheme and
the role of financial services regulation.
The Report commends the Pensions Commission for stressing
the challenges and the opportunities presented by the economic,
demographic and social changes in the coming century in its second
report. The Committee fully endorses the Commission's recommendation
on the need to both fully address these factors and to ensure
a coherent and consensual approach in order to provide a sustainable
The Government published its wide-ranging proposals
to reform the State and private pension systems in the White Paper,
Security in retirement: towards a new pensions system, on 25 May
2006. The White Paper proposes a simpler, fairer State pension,
with broader coverage, less means-testing and a stronger basis
on which to build a more robust private pensions system. These
proposals represent a radical reform to the UK's pension system
and the Government is currently consulting on these proposals
with a number of external stakeholders including: the pensions
industry; representatives of employer, employee and trade union
groups; and charities.
The period of consultation on the proposals contained
in the White Paper ends on 11 September 2006. The Government will
publish a document later setting out move detailed proposals on
the introduction of personal accounts. The Government welcomes
the Committee's recognition of the importance of this ongoing
engagement to secure a sustainable and lasting settlement that
The report is a valuable contribution to arriving
at a consensus solution and many of the Committee's recommendations
have been proposed in the White Paper or are areas where the Government
has set out a further programme of work to take forward the proposals
to introduce personal accounts.
Conclusions and Recommendations
WHITE PAPER PROPOSALS
The Committee has made a number of specific recommendations
and conclusions. Many of these are proposed in the White Paperin
particular the Government believes that the following recommendations
form part of the White Paper proposals.
1. One of the starting points for consideration
of proposals by the Pensions Commission and of rival proposals
must be the realisation that Stakeholder pensions have not been
successful in halting the decline of non-State pension provision
among middle earners. Indeed, a combination of sales approaches,
commission incentives, regulatory requirements and decisions about
the charge cap have created a position in which Stakeholder pensions
are seen as uneconomic to both providers and potential customers
among the original target market of middle income earners. The
lessons from this process must be learned in taking forward proposals
arising from the work of the Pensions Commission. We have sought
to draw out these lessons in our ensuing conclusions and recommendations.
Stakeholder pensions have been a success for its
target audience and their introduction has made a good value personal
pension vehicle widely accessible for the first time. This is
backed up by the sales figures which show that:
- Just over 2.7 million stakeholder
pensions have been sold from their introduction on 6 April 2001
to 31 December 2005.
- Stakeholders are being bought by their target
market of moderate earners; around two-thirds of those taking
up the pension are workers earning less than £20,000 a year.
- 99% of stakeholder pensions receiving contributions
in 2003/04 were held by people in work.
- In 2004/05, total contributions to stakeholder
pensions were around £2.4 billion.
The Government proposes to build on the success of
stakeholder pensions and introduce a low-cost saving scheme of
personal accounts for low- to middle-income earners who have not
been traditionally targeted by the pensions industry.
2. The Pensions Commission is to be congratulated
for bringing about a broad consensus in favour of auto-enrolment
as the basis for securing a major advance in the level of private
pension saving among middle earners. A move to auto-enrolment
is an essential precondition if the NPSS or any rival option is
to be implemented. (Paragraph 33)
The White Paper confirms the Government's commitment
to introducing auto-enrolment into either personal accounts or
a workplace-based private pension for eligible employees to maximise
coverage and address savings inertia.
3. The compulsory matching employer contribution
is an integral element of the NPSS and of the rival options. If
there were to be no such contributions, the FSA's evidence indicates
that it is unlikely that participation in the proposed scheme
or schemes could be provided for without some regulated advice.
With the increased costs consequent upon the need for such advice
and diminishing contributions overall, it appears open to question
whether a new scheme or schemes without such contributions would
represent a step-change from Stakeholder pensions. (Paragraph
The White Paper confirms the Government's commitment
to introducing compulsory matching employer contributions where
an employee remains opted in to personal accounts or a workplace
private pension scheme.
4. The successful delivery of a new pension saving
vehicle suitable for the vast majority of those eligible to contribute
and thus not requiring regulated sales advice is contingent upon
expectations about the extent and future course of means-testing
for pensioners. These expectations are dependent not only on announcements
expected in the Pensions White Paper, but also on the ability
of present and future Governments to establish a policy framework
based on a broad political consensus, together with accompanying
forecasts on those eligible for means-testing, which deserve and
attract the confidence of the public. (Paragraph 49)
The White Paper proposals on state pension reform
set out the Government proposals to reduce the spread of means
testing, providing a clear foundation from which individuals can
save for their retirement. These proposals have commanded widespread
16. There is a great and unique opportunity to
reverse the decline in private pension provision and restore confidence
in long-term savings. For this opportunity to be seized there
needs to be an integrated approach in which three preconditions
are met. The first precondition is that the correct balance is
struck between the role of the State in securing and promoting
a new pension savings product and the sense of individual ownership.
The second precondition is that the new product maintains the
simplicity and near-universal suitability proposed by the Pensions
Commission to minimise cost and the need for regulation. The third
precondition is that reform of private pension saving takes place
in tandem with a new direction in the State pension system. (Paragraph
The Government believes that the package of reforms
detailed in the White Paper meets the three pre-conditions outlined
- the portability of personal
accounts will enable individuals to hold a single pension account
through their working lives, thereby engendering a sense of individual
- the introduction of a low cost system of personal
- State Pension reforms will create a solid foundation
on which people can build up private savings.
These proposals will meet the pensions challenge
in the long- term and provide a long and lasting settlement.
ONGOING WORK PROGRAMME
The other recommendations and conclusions set out
the Committee's view on how the Government should take forward
its programme of work. The Government welcomes the Committee's
insight in this area and will take these comments into account
as its moves towards the detailed design phase of personal accounts.
Looking at the individual recommendations:
5. It is of vital importance not only that the
Government establishes a long-term coherent approach to policy
on private and public pension provision and communicates effectively
with the FSA in relation to the FSA's regulatory requirements,
but also that the Government continues to provide leadership and
support to ensure that a regulatory position on suitability in
relation to the NPSS or a rival option, once arrived at by the
FSA, proves sustainable in the long-term. (Paragraph 50)
The Government is committed to ensuring that an effective
and robust regulatory regime is established for personal accounts.
The nature of the regulatory regime for personal accounts, the
necessary enforcement powers, and how they might be applied is
an issue the Government is considering, working closely with the
Pensions Regulator and the Financial Services Authority to reach
a consensus on a long-term, sustainable regulatory framework.
6. We recommend that the Government give consideration
at an early stage in implementation of an NPSS or any comparable
measure to the design and availability of generic advice to those
considering participation in the scheme as well as to scheme members.
It may well be that the requirement for generic advice in this
context will need to be met as part of wider endeavours to improve
the quality of generic financial advice that we are considering
during our current inquiry into financial inclusion. (Paragraph
The Government agrees it is vital that communication
with members of the new scheme is designed to help them, to make
informed decisions about their saving.
- The White Paper confirms the
Government's commitment in this area and sets out an extensive
work programme in this area, involving:
- developing an information and communications
strategy to support the introduction of personal accounts, including
a high-level awareness-raising campaign, and specific information
and support to employers, individuals and the voluntary sector;
- continuing our work on improving public understanding
of pensions; and
- working with the FSA and others on a broader
financial capability strategy.
7. One of the keys to the success of the NPSS
or an alternative that is implemented is the minimisation of the
need for regulation, because regulation entails additional costs.
The NPSS and the NAPF model remove the element of employee choice
about a provider, and thus the possibility that such a choice
may have regulatory implications. The ABI model introduces consumer
choice. From the evidence we received, not least from the FSA,
it seems likely that such choice will create additional regulatory
requirements which may in turn affect the overall costs of any
scheme based on that model. This places an additional onus on
the ABI to provide convincing evidence that provider competition
will serve to drive down costs. (Paragraph 59)
As set out in the White Paper the Government is currently
carrying out an assessment to identify the best delivery model
for personal accounts, considering inter-alia value for money
for the taxpayer and the saver and the impact of consumer choice
8. The availability of investment choices which
are clearly signposted and accompanied by appropriate information
about risk and reward is highly desirable and catered for under
the proposed design of the NPSS. Nevertheless, much evidence suggests
that most members will remain in the default fund. The design
of the range of funds, especially the default fund, and the quality
of asset management of the funds, would be crucial to the success
of the NPSS. We expect the case for independent scrutiny, especially
of the default fund, to be one of the issues to be considered
during parliamentary scrutiny of the measures arising from the
White Paper. (Paragraph 63)
The Government agrees that consumers must have access
to good quality information about pensions and retirement planning
to help them make informed decisions about saving for retirement.
As set out in our responses to recommendation 6, we have set in
train an extensive work programme in this area. This will include
the scrutiny and governance arrangements for personal accounts.
The issue of the range of funds available and default
options will depend on the delivery model adopted for personal
9. If the Government sets out the detail of governance
arrangements for a single provider of pensions and funds within
a single scheme, based on the proposals of the Pensions Commission,
it will be important for the Government to clarify at an early
stage the likely responsibilities of the FSA for prudential regulation
in relation to the provider and funds within a single scheme.
The Committee endorses the recommendation of the Pensions Commission
that the governance should secure an institution which is clearly
separate from direct government influence and which is also, in
the words of the Commission "clearly public and non profit-making".
The system of governance of personal accounts will
depend to some degree on the delivery model adopted. The Government
is currently working with the Pensions Regulator and the FSA on
10. There is a possibility of effective public
sector purchase of relevant administrative services from the private
sector, provided that the purchasers on behalf of the NPSS or
any similar national scheme have the relevant skills, whether
acquired in the public or private sectors. It is important that
overall administrative costs are minimised and that an appropriate
balance of risk between public and private sector is achieved.
The Government agrees that administrative costs in
personal accounts should be minimised and recognises the importance
of ensuring risk is managed effectively. These factors will be
taken into account in the assessment of the most appropriate delivery
model to personal accounts.
11. In the event that the Government proposes
a model for private pension provision based on the NPSS, we recommend
that the Government, in its response to this Report, set out the
matters that will need to be considered before a final decision
is reached on collection systems. (Paragraph 69)
The issue of appropriate collection systems is a
matter that will be taken into account in the assessment of the
most appropriate delivery model for personal accounts. In particular
we would like to ensure it is low cost, efficient and easy for
12. We welcome the early indications from the
FSA that it will be alert to the possibility of mis-selling within
the context of transfers in and out of the NPSS. It is essential
that information provided to members and potential member of any
new scheme includes clear guidance on circumstances where it might
and might not be appropriate to transfer in or out of the scheme.
As set out in our responses to recommendation 6,
we have set in train an extensive work programme on the information
requirements for personal accounts.
13. Experience of Stakeholder pensions indicates
that market operators may exert pressure for any charge cap to
be increased and may tend to serve the most profitable parts of
a market, not those most in need. (Paragraph 75) &
14. It is of crucial importance to the success
of the NPSS and the overall trend of private pension savings that
the Annual Management Charge is as low as possible and moves in
a downward direction. An independent Board of the NPSS would have
every incentive to see charges low and falling, as would the trustees
of a Super Trust. (Paragraph 76)
The Government is strongly committed to a low-cost
management structure for personal accounts. One of the key objectives
of personal accounts is to reduce the cost of pensions saving.
The level of charges will be one of the key criteria in the assessment
of the most appropriate delivery model for personal accounts,
including how charges would fall further over time.
15. We agree with Lord Turner that the higher
social priority in this area is to promote additional pension
provision for those who currently lack it. Nevertheless, we consider
that the market impact of a new scheme, both prior to implementation
and following implementation, merits further study and we recommend
that the Government give further consideration to these issues
at an early stage. We also recommend that the Government consider
further measures to enhance public understanding of the long-term
financial value of occupational pension schemes. (Paragraph 79)
The Government agrees with the Committee that the
issue of the impact on the existing pensions market will be carefully
scrutinised in the assessment of the most appropriate delivery
model for personal accounts.
Department for Work and Pensions
21 July 2006