07 April 2006
Pensions experts have attacked leaked government proposals for life insurance firms to manage billions of pounds of retirement assets as part of a potential compromise over the national savings scheme proposed by Lord Turner.
Consumer group Which? described the plans as a potential 'disaster-in-waiting'.
It warned that a likely response to any widespread use of life insurance firms could be a higher rate of opt-outs from a future National Pension Savings Scheme.
Mick McAteer, policy adviser at Which?, told Public Finance that 'ministers would have a lot of explaining to do' to persuade a sceptical public that insurers were the ideal guardians of their retirement savings, because the public had become 'embittered' by past pension scandals involving insurers.
'There is very little consumer trust in the insurance industry – any national scheme involving them would be a non-starter for many people. Recent research suggests that just 11% of people would trust insurers to run a national scheme, compared with 41% for an independent body and 20% in the government.'
Speaking at the launch of his Pensions Commission's final proposals on April 4, Lord Turner warned that taxes might have to rise to pay for the higher basic state pension that forms part of his proposals. 'The government now faces the difficult decision of how far and how fast it can move to reform the BSP,' he said.
Turner has proposed linking rises in the BSP to average earnings – a relatively expensive idea said to be at the root of disagreement between Chancellor Gordon Brown and Prime Minister Tony Blair.
Brown moved quickly to reject those claims this week. He said there was 'no issue of principle' over the link to earnings and that 'the issue still to be resolved' was affordability. Turner's proposals would increase spending on pensions by £8bn by 2020, when the government expects total spending on the BSP to be at least £104bn.
The leaked plans, reported on April 5, were part of the Department for Work and Pensions' preparation for the forthcoming pensions white paper. They involved work on an NPSS model – into which all UK employees could be automatically enrolled to overcome a huge current shortfall in retirement savings.
This indicated that the DWP has accepted that employers, as well as employees, should be compelled to pay into the scheme if they do not already offer a retirement package.
The leaks suggest that ministers could back away from establishing the government-run, low-cost NPSS called for by Turner. One Whitehall source claimed that ministers were 'politically reluctant' to establish a system that would leave them open to criticism if investment returns were poor or if the entire system failed.
Instead, one option being entertained by the DWP suggests a compromise, with a government agency collecting contributions, but with employees choosing how cash would be invested by insurance firms.
The Association of British Insurers' submission to government had proposed allowing employers to decide how the cash would be invested by insurers.
But McAteer told PF that any ABI-related system would 'invariably' be more expensive to operate than Turner's estimated cost of a government-led NPSS: 0.3% of the cash in the system.
'We estimate it would cost around 1.1%–1.4% to operate the ABI's scheme, possibly more. Insurers have a record of being unable to deliver savings schemes at low costs – just look at what happened with stakeholder pensions, where the cost of provision was capped but later lifted because providers could not operate at low costs.
'The additional cost of an ABI-led scheme could eat up as much as 30% of an individual's pension on retirement,' McAteer added.
Such reduced savings would undermine the Pension Commission's overall aim: to get the 11 million Britons currently not saving enough for their retirement to save more. Turner's team targeted an average 'income replacement rate' of between 45%–60% through their package.
However, a senior DWP source told Public Finance that the hybrid model was merely one of several potential NPSS systems under consideration. The source added that Work and Pensions Secretary John Hutton had not made a final decision and that Turner's lower-cost model 'remains the one to beat'.
Criticisms that ministers were sceptical of the risks attached to failures were 'misplaced', the source added, because any NPSS model that provides options on how cash is invested would make it clear that savers were also responsible for their retirement assets.
Pensions minister Stephen Timms confirmed on April 4 that the white paper, which is also expected to improve entitlements to the Basic State Pension for carers and women who take time out of their careers to have children, would be published 'in the next two months'.
PFapr2006
