Back in 2004 I commented that the solutions already proposed and continuing
to be proposed focussed on the wrong thing; namely cost. See http://tinyurl.com/jxov9 for my comments published at that time. This continues to be the problem
today.
The fixation with the idea that people will buy something if you make
it cheap enough is fatally flawed, as has been proved by the lack of
take up of Stakeholder pensions.
The challenge is not one of cost but of distribution and education.
Saving is not an exciting subject. Today we have play now pay later generation.
What we need is a pay now play later mentality.
There are only two ways that this can be achieved; either by compulsion
or by education. Soft compulsion, where there is an opt out, will not
work. As a professional Independent Financial Adviser I have established,
very low cost (0.6% per annum or less), Group Stakeholder Pension Schemes
where the employer will contribute 3% of salary is the employee contributes
3% of salary, but without there being any access to education or advice
as the charging structure will not cover the cost of advice and education.
In these schemes the take up is less than 4% of staff even thought the
scheme is heavily prompted by the employer through direct offer packs
etc.
In other schemes that I run where there is room for the cost of advice
and education the take up is effectively 100%. These schemes tend to
have a reduction in yield of 1.1%, which is the same as a Stakeholder
Scheme, before the increase in early years charges to 1.5% but these
schemes are not Stakeholder compliant because of the way in which the
charges are levied. The added benefit of the way in which the charges
are levied on this type of plan is that it encourages long term savings.
Remember: We have £1300bn in funded pensions; virtually all built
up under the old "high-charge" structures. This is more than
the rest of the EU put together.
Focus on cost is not going to solve the problem. Focus on value, education
and advice that is properly paid for will.
Remember that we did not have a savings gap until the Government started
to tax pension funds and allowed contribution holidays for occupational
schemes. If no employer had been allowed by the Revenue to take a contribution
holiday then we would not now have any under-funded occupational schemes.
One needs to build up reserves in the good years of investment performance
to see one through the years of bad investment performance.
I feel my awards must add some weight to the validity of my comments,
see below!
Kind regards,
James G Brooke Cert PFS
Financial Architect Winner 'Group Pensions IFA of The Year 2006' and
runner up 'Overall IFA of The Year 2006' awarded by 'Financial Adviser',
a 'Financial Times'
publication.
FRED CARTER wrote:
I am outraged that I will have to pay for yet another state pension,
seeing as how due to the increasing numbers of old people I probably
will not get the first state pension I am already paying for.
JUST HOW MANY TIMES ARE YOU GOING TO ASK US TO PAY FOR OUR PENSION?
Richard O'Brien wrote:
Does anyone in government believe that employers and employees in companies
with say 10 or more employees should compelled to contribute to a pension
scheme whether it is the employers own or some form of state run or provided
by a nominated pension provider, this at a time when increasing numbers
of employers are closing good final salary schemes and replacing them
with cheaper alternatives and invariably employers are paying less into
money purchase schemes.
David Quinn wrote:
I am concerned about this because it does not, and probably cannot,
tackle the basic problem of pensions, which is that they have to be paid
out of the economy at the time they are paid and can only be paid at
the rate the economy can afford (or decides it can afford) at that time.
They are not really directly related to savings. Savings are only a claim
on the economy, not a guarantee. We have already seen this with annuities
where, because rates of interest dropped, the absolute level of annuities
fell to a fraction of the expectations of those who had paid into pension
funds. Essentially the economy welched on the deal that savers had been
led to expect.
This relationship of pensions to affordability is so basic I was convinced
it was behind Gordon Brown's insouciance while the whole pension system
fell apart. Obviously he could not do anything about the collapse of
the stock market but I cannot believe that his taxing of pension funds,
his failure to do anything about the collateral damage done to pensions
by FRS17 and his failure to stop companies using the cover of backing
out of final salary commitments to reduce their normal level of contributions
can have been accidental. It was surely an attempt to reduce pension
commitments on the future economy. If personal accounts seek to support
the level of commitment there will be a danger that savers will again
short changed when it comes to paying out. The raising of the pension
age will have mitigated this somewhat but probably not enough.
Jonathan Whitney wrote:
I still believe the government should increase their share from 1 to
2%.
James Purnell responded:
Personal accounts will be subject to the
same tax relief rules as other pension saving products. Saving
for retirement in a pension is very
tax efficient and the government encourages individuals to
do so.
clifford douglas sharp wrote:
The semi-compulsory NPSS has a basic weakness as shown in the following
statement:-
In the Pensions White Paper outlining Government's intentions regarding
changes to the relationships between State, Occupational and Personal
pension, the most important decision is probably that the current State
Means Tested Allowances for Pension Credit, Housing Allowances and Council
Tax (SMTAs) are unchanged and are likely to continue for at least some
years in whole, or in part.
If SMTAs are to remain, the conflict between the benefits an individual
could get from the proposed compulsory scheme, the NPSS, and those he/she
would be able to claim from the State Means Tested Allowances (SMTAs)
remains. So does the possibility of inertia mis-selling if the lower
paid are influenced into staying in the NPSS scheme when, given proper
advice, they would opt out.
Here are some relevant facts. Pensions Credit is £114.05 weekly,
indexed. Lower paid men retiring at age 65 would also be entitled to
Housing Benefit plus Council Tax Allowance. Added together this would
easily total £200 weekly, i.e. over £10 000pa - indexed.
Using the cost of index-linked annuities currently available from life
assurance companies i.e about 5% pa for a man aged 65 the cost of providing
comparable benefits to the £10 000 available from the SMTAs is
likely to be of the order of £200 000. It is highly unlikely that
that amount could be accululated through the NPSS.
While there will be few entitled to the full amount of the Pension Credit
because they will have earned State Pensions, there are many women over
age 45 with minimum such entitlement.
Who is to advise them to opt out? what will the Financial Services Authority
be doing?
James Purnell responded:
The availability of tax relief and a minimum employer contribution will
provide a significant boost to individual's pension savings outcomes
and helps to strengthen incentives to save.
The majority of people saving in a personal account will enhance their
retirement income but we realise that, given people experience a range
of circumstances, not everyone may wish to save, and this is why we are
enabling people to opt out.
If a person doesn't save for retirement they could end up with an income
equivalent to around £114 a week. For many people such a substantial
drop in income on retirement would be unacceptable – they have
an incentive to save for retirement and our proposed reforms will enable
them to do this.
We will be providing information to enable people to take a choice that
is in their best interests.
Barry Haigh wrote:
Why can't you allow pensioners to put more than £3,000 per year into
an ISA accoount. I have been working unpaid abroad for 40 years and have
retired to UK. I would like to put all my saving into an ISA and be self
sufficient. Also, why can't the free bus pass include local rail travel
as buses are only 1 per hour.
James Brooke Cert PFS wrote:
I note that James Purnell reponds to the points made in 36 and 37 by
saying that pensions are very tax efficient. I am afraid I have to disagree
most strongly. Pensions only provide excellent tax deferral, but they
are not at all tax efficient (unless you die before retirement). In fact
in order for a 65 year old male to be better off saving in a pension,
than not having a pension at all, he needs to live to age 135. I would
suggest that, not withstanding the proposed improvements to the NHS,
it is most unlikely that age 135 will be reached. Sadly lack of space
here prevents me explaining how I calculate these figures...
Frank Nelson wrote:
Many of the proposals on Personal Accounts are welcome and (if implemented
correctly) will provide a significant part of the solution to the issues
surrounding savings for long term Pensions provision but there is a clear
and present danger that the proposals will not work as well as they need
to.
The danger arises from the ease with which many employees - particularly
when young and/or over committed - will choose (or be persuaded by their
employer) to opt out of their Personal Account without needing to evidence
that they have made or are making suitable provision for their income
retirement.
It is disturbing and disappointing to read in the White Paper Cm6975
:
Page 30 Para 65: that the Government have agreed with the Pensions Commission
and rejected ".. a compulsory approach to private savings because
there will always be some groups who should not be saving towards a pension
- for example those paying off high burdens of debt."
and alarming to read later in the same document
Page 53 Para 1.12: “… Anyone can of course opt out if they
feel they cannot afford to contribute…”
Having been an employee elected Trustee of a major private sector Pension
Scheme since 1988 and an activist on Pensions since 1978 who (I confess)
would not have joined my employer’s contributory Pension scheme
in 1974 (had I not been contractually obliged to do so) I am absolutely
1000% confident that
1) many employees who have opted out of the scheme will (when they come
near to retirement) regret having opted out.
We all know that people (particularly young workers with Student Loans
or young families to look after) often opt out of pensions and endowment
policies - in a financially inappropriate way - when money is short.
It is precisely at this point in a person’s life cycle/life stage
that compulsion is so important. The White Paper argues succinctly why
and how £1 saved at 22 is worth so much more (when you retire)
than £1 saved at 52 yet the freedom to opt out is embedded in the
paper and, based on the content on Page 53 Para 1.12, will be well communicated
to the target group - increasing even more the propensity to opt out.
2) to minimise their pensions costs many employers (particularly small
employers) will actively promote the opt out feature to new employees
(or existing employees either on attaining age 22 or at the time the
scheme is launched)
Notwithstanding the “whistle blowing” and “re-enrolment” provisions
suggested in the White Paper many employers will be making it very clear
to employees (particularly younger employees) that they need not make
their 4% contributions to the scheme and, without question, there will
not be a flood of Tribunal cases to evidence such actions by employers.
It is clear - from reading the White Paper - that during the latter
part of 2006 employer lobbyists were only willing to sanction the removal
of the waiting period providing the opt out provision was retained and,
by default, a truly compulsory scheme not introduced.
Of course, there will be a very small number of older workers (nearing
retirement) and a microscopically small number of younger asset rich
younger workers (with significant wealth/inheritances) for whom the freedom
to opt out may be worthwhile but I would urge you not to use this handful
of people with very special personal circumstances to justify the implementation
of an opt out system which will prejudice the success of these otherwise
worthwhile and laudable proposals.
James Brooke Cert PFS wrote:
Back in 2004 I commented that the solutions already proposed and continuing to be proposed focussed on the wrong thing; namely cost. See http://tinyurl.com/jxov9 for my comments published at that time. This continues to be the problem today.
The fixation with the idea that people will buy something if you make it cheap enough is fatally flawed, as has been proved by the lack of take up of Stakeholder pensions.
The challenge is not one of cost but of distribution and education. Saving is not an exciting subject. Today we have play now pay later generation. What we need is a pay now play later mentality.
There are only two ways that this can be achieved; either by compulsion or by education. Soft compulsion, where there is an opt out, will not work. As a professional Independent Financial Adviser I have established, very low cost (0.6% per annum or less), Group Stakeholder Pension Schemes where the employer will contribute 3% of salary is the employee contributes 3% of salary, but without there being any access to education or advice as the charging structure will not cover the cost of advice and education. In these schemes the take up is less than 4% of staff even thought the scheme is heavily prompted by the employer through direct offer packs etc.
In other schemes that I run where there is room for the cost of advice and education the take up is effectively 100%. These schemes tend to have a reduction in yield of 1.1%, which is the same as a Stakeholder Scheme, before the increase in early years charges to 1.5% but these schemes are not Stakeholder compliant because of the way in which the charges are levied. The added benefit of the way in which the charges are levied on this type of plan is that it encourages long term savings.
Remember: We have £1300bn in funded pensions; virtually all built up under the old "high-charge" structures. This is more than the rest of the EU put together.
Focus on cost is not going to solve the problem. Focus on value, education and advice that is properly paid for will.
Remember that we did not have a savings gap until the Government started to tax pension funds and allowed contribution holidays for occupational schemes. If no employer had been allowed by the Revenue to take a contribution holiday then we would not now have any under-funded occupational schemes. One needs to build up reserves in the good years of investment performance to see one through the years of bad investment performance.
I feel my awards must add some weight to the validity of my comments, see below!
Kind regards,
James G Brooke Cert PFS
Financial Architect Winner 'Group Pensions IFA of The Year 2006' and runner up 'Overall IFA of The Year 2006' awarded by 'Financial Adviser', a 'Financial Times' publication.
FRED CARTER wrote:
I am outraged that I will have to pay for yet another state pension, seeing as how due to the increasing numbers of old people I probably will not get the first state pension I am already paying for.
JUST HOW MANY TIMES ARE YOU GOING TO ASK US TO PAY FOR OUR PENSION?
Richard O'Brien wrote:
Does anyone in government believe that employers and employees in companies with say 10 or more employees should compelled to contribute to a pension scheme whether it is the employers own or some form of state run or provided by a nominated pension provider, this at a time when increasing numbers of employers are closing good final salary schemes and replacing them with cheaper alternatives and invariably employers are paying less into money purchase schemes.
David Quinn wrote:
I am concerned about this because it does not, and probably cannot, tackle the basic problem of pensions, which is that they have to be paid out of the economy at the time they are paid and can only be paid at the rate the economy can afford (or decides it can afford) at that time. They are not really directly related to savings. Savings are only a claim on the economy, not a guarantee. We have already seen this with annuities where, because rates of interest dropped, the absolute level of annuities fell to a fraction of the expectations of those who had paid into pension funds. Essentially the economy welched on the deal that savers had been led to expect.
This relationship of pensions to affordability is so basic I was convinced it was behind Gordon Brown's insouciance while the whole pension system fell apart. Obviously he could not do anything about the collapse of the stock market but I cannot believe that his taxing of pension funds, his failure to do anything about the collateral damage done to pensions by FRS17 and his failure to stop companies using the cover of backing out of final salary commitments to reduce their normal level of contributions can have been accidental. It was surely an attempt to reduce pension commitments on the future economy. If personal accounts seek to support the level of commitment there will be a danger that savers will again short changed when it comes to paying out. The raising of the pension age will have mitigated this somewhat but probably not enough.
Jonathan Whitney wrote:
I still believe the government should increase their share from 1 to 2%.
clifford douglas sharp wrote:
The semi-compulsory NPSS has a basic weakness as shown in the following statement:-
In the Pensions White Paper outlining Government's intentions regarding changes to the relationships between State, Occupational and Personal pension, the most important decision is probably that the current State Means Tested Allowances for Pension Credit, Housing Allowances and Council Tax (SMTAs) are unchanged and are likely to continue for at least some years in whole, or in part.
If SMTAs are to remain, the conflict between the benefits an individual could get from the proposed compulsory scheme, the NPSS, and those he/she would be able to claim from the State Means Tested Allowances (SMTAs) remains. So does the possibility of inertia mis-selling if the lower paid are influenced into staying in the NPSS scheme when, given proper advice, they would opt out.
Here are some relevant facts. Pensions Credit is £114.05 weekly, indexed. Lower paid men retiring at age 65 would also be entitled to Housing Benefit plus Council Tax Allowance. Added together this would easily total £200 weekly, i.e. over £10 000pa - indexed. Using the cost of index-linked annuities currently available from life assurance companies i.e about 5% pa for a man aged 65 the cost of providing comparable benefits to the £10 000 available from the SMTAs is likely to be of the order of £200 000. It is highly unlikely that that amount could be accululated through the NPSS.
While there will be few entitled to the full amount of the Pension Credit because they will have earned State Pensions, there are many women over age 45 with minimum such entitlement.
Who is to advise them to opt out? what will the Financial Services Authority be doing?
Barry Haigh wrote:
Why can't you allow pensioners to put more than £3,000 per year into an ISA accoount. I have been working unpaid abroad for 40 years and have retired to UK. I would like to put all my saving into an ISA and be self sufficient. Also, why can't the free bus pass include local rail travel as buses are only 1 per hour.
James Brooke Cert PFS wrote:
I note that James Purnell reponds to the points made in 36 and 37 by saying that pensions are very tax efficient. I am afraid I have to disagree most strongly. Pensions only provide excellent tax deferral, but they are not at all tax efficient (unless you die before retirement). In fact in order for a 65 year old male to be better off saving in a pension, than not having a pension at all, he needs to live to age 135. I would suggest that, not withstanding the proposed improvements to the NHS, it is most unlikely that age 135 will be reached. Sadly lack of space here prevents me explaining how I calculate these figures...
Frank Nelson wrote:
Many of the proposals on Personal Accounts are welcome and (if implemented correctly) will provide a significant part of the solution to the issues surrounding savings for long term Pensions provision but there is a clear and present danger that the proposals will not work as well as they need to.
The danger arises from the ease with which many employees - particularly when young and/or over committed - will choose (or be persuaded by their employer) to opt out of their Personal Account without needing to evidence that they have made or are making suitable provision for their income retirement.
It is disturbing and disappointing to read in the White Paper Cm6975 :
Page 30 Para 65: that the Government have agreed with the Pensions Commission and rejected ".. a compulsory approach to private savings because there will always be some groups who should not be saving towards a pension - for example those paying off high burdens of debt."
and alarming to read later in the same document
Page 53 Para 1.12: “… Anyone can of course opt out if they feel they cannot afford to contribute…”
Having been an employee elected Trustee of a major private sector Pension Scheme since 1988 and an activist on Pensions since 1978 who (I confess) would not have joined my employer’s contributory Pension scheme in 1974 (had I not been contractually obliged to do so) I am absolutely 1000% confident that
1) many employees who have opted out of the scheme will (when they come near to retirement) regret having opted out.
We all know that people (particularly young workers with Student Loans or young families to look after) often opt out of pensions and endowment policies - in a financially inappropriate way - when money is short.
It is precisely at this point in a person’s life cycle/life stage that compulsion is so important. The White Paper argues succinctly why and how £1 saved at 22 is worth so much more (when you retire) than £1 saved at 52 yet the freedom to opt out is embedded in the paper and, based on the content on Page 53 Para 1.12, will be well communicated to the target group - increasing even more the propensity to opt out.
2) to minimise their pensions costs many employers (particularly small employers) will actively promote the opt out feature to new employees (or existing employees either on attaining age 22 or at the time the scheme is launched)
Notwithstanding the “whistle blowing” and “re-enrolment” provisions suggested in the White Paper many employers will be making it very clear to employees (particularly younger employees) that they need not make their 4% contributions to the scheme and, without question, there will not be a flood of Tribunal cases to evidence such actions by employers.
It is clear - from reading the White Paper - that during the latter part of 2006 employer lobbyists were only willing to sanction the removal of the waiting period providing the opt out provision was retained and, by default, a truly compulsory scheme not introduced.
Of course, there will be a very small number of older workers (nearing retirement) and a microscopically small number of younger asset rich younger workers (with significant wealth/inheritances) for whom the freedom to opt out may be worthwhile but I would urge you not to use this handful of people with very special personal circumstances to justify the implementation of an opt out system which will prejudice the success of these otherwise worthwhile and laudable proposals.