Memorandum submitted by the Royal London Group (PE 20)



About Royal London


Royal London has been looking after the financial needs of our customers for more than 150 years, with over 3 million customers and funds totalling 32.9 billion. We are one of Britain's largest pension providers, with decades of experience in looking after the retirement plans of millions of individuals, particularly through our pensions subsidiary Scottish Life.

The Pensions Bill


Half the UK workforce has little or no pension provision. While we appreciate the Government's determination to bring in legislation to deal with this problem, several core concerns with the current Pensions Bill must be addressed. In our view the current Bill:

makes no provisions to avoid the levelling down of employer contributions;

fails to address the unfortunate interaction of pension saving with means-tested benefits and disincentive to save this creates;

does nothing to permit automatic enrolment into existing contract-based schemes (such as GPPs) or address the unintended consequences of the EU's Distance Marketing Directive;

relies heavily on the problematic concept of generic financial advice.



1. Levelling Down


We believe that the 3% minimum contribution level for employers, sets too low a standard for employer contributions, and will be too low for many individuals to build a sufficient pension fund.


All private sector research among employers and pension advisers points to the introduction of Personal Accounts bringing about a "levelling down" of contributions. Although larger employers may be able to maintain higher contribution levels as a "valuable recruitment mechanism", small and medium sized enterprises forced to broaden membership of their schemes will be have to seek ways to control their costs. This may be achieved by reducing contribution levels to what some may perceive to be "the going rate" set by the "government-backed" plan. This 'going rate' may foster the belief that a 3% contribution is sufficient to build a decent income in retirement, when in fact this is far from the case.


Together with auto-enrolment, the compulsory employer contribution will undoubtedly broaden participation in pension schemes, whether Personal Accounts or other plans. Yet when millions of new members join pension schemes, employers' contribution bills will rise considerably. This 'levelling down' of employer contributions into Personal Accounts and other auto-enrolled schemes may mean that the overall level of pensions saving fails to rise, and may lead to the closure of schemes with more generous employer contributions.



2. Automatic Enrolment and Suitability


Given the number of people lacking provision for retirement, we welcome attempts to broaden participation in pension schemes. It is imperative that in widening participation, the new Personal Accounts scheme does not enrol millions in unsuitable schemes. The way in which means-tested benefits interact with income from pension schemes could provide a significant disincentive to save.


If the system of means-tested benefits persists, those paying money into Personal Account schemes could contribute as much as 25,000 to a personal account and be no better off than someone who does nothing but is able to claim means-tested benefits. Even after recent reforms, 40 per cent of those who would be auto-enrolled in personal accounts will be eligible for means-tested benefits.


Furthermore, those who opt out of Personal Accounts will become financial 'lepers' in the future, as a financial adviser recommending other savings product rather than enrolling in Personal Accounts might be at risk of future mis-selling litigation.


Schemes based on auto-enrolment cannot take account of individual financial circumstances or entitlements to means-tested benefits. We would suggest that this pensions legislation should be accompanied by a careful recalibration of the means-testing system, to prevent other government policies rendering this scheme ineffective. Disregarding pensions savings in means-testing would ensure that the benefits system will not undermine Personal Account savings, or disincentivise saving.



3. Qualifying schemes and automatic enrolment schemes


We welcome provisions in this legislation enabling jobholders to be auto-enrolled into group personal pension schemes as well as Personal Accounts. We remain concerned that under the EU Distance Marketing Directive it is currently illegal to auto-enrol jobholders into the schemes defined in sections 14, 15 and 16 of the Bill.


In order to ensure that Personal Accounts compliment, rather than replace, existing pension provision, we would urge the government to ensure that this crucial issue is addressed well before Personal Accounts are implemented in 2012.



4. Generic Financial Advice


By commissioning Otto Thoresen to produce a review of generic financial advice, the government has acknowledged that millions of people in the UK have little understanding of their financial options and have few sources of reliable guidance and advice.


Though we eagerly await the results of the Thoresen review, we are concerned that the principle of generic financial advice is not fit for purpose in a pensions context. This concern is true of today's pension market and will be exacerbated by the arrival of Personal Accounts


Given the extraordinary complexity of the pensions system, and its interaction with means-tested benefits such as housing benefit or pension credit, we fear that, by its very nature, generic advice will not be adequate for millions of employees faced with the choice of saving in a Personal Account or opting out. If the system cannot be made less complex, then it must be possible for those enrolled in Personal Accounts to have some form of redress if unsuitable generic advice results in people losing their savings.



5. Conclusion


Royal London believe that this legislation is of crucial importance to the future of pensions provision in the UK, and that a robust solution is vital to ensure confidence in the pensions system.


If the problems outlined above are not acknowledged in the passing of this Bill, we fear that the solutions proposed by the Government may fail to alleviate the pensions crisis currently affecting millions of people across the country.


January 2008