According to a press release, the Commission’s first report, published in October of 2004, suggested some mix of four options to help with the nation’s troubled pension scheme. The options were that the pensioner will become poorer relative to the rest of society, taxes/national insurance contributions will have to rise, savings must rise, and the average retirement age must rise. The current report gives recommendations for the latter three since the first option is the least desirable.
Adair Turner, Vice Chairman of Merrill Lynch Holdings Ltd, is the chairman of the Commission. Turner noted in the release that the current system is under strain since people are living longer, baby boomers are entering retirement, people are not saving enough, and the state and employers plan to play a decreasing role in providing pensions for the average earner. In the release he said, “There are no easy answers. But an integrated set of policies can ensure that increasing life expectancy becomes not a problem but an opportunity for everyone.”
A New Settlement
As expected, recommendations from the Pensions Commission included auto-enrollment in the nation’s pension scheme (See UK Commission Favors Auto Enrollment ) and an increase in the nation’s retirement age (See UK Pension Official: Let’s Discuss Retirement Age Increase ).
The key recommendations are:
- the establishment of a National Pensions Saving Scheme into which all employees without good existing provision would be automatically enrolled but with the right to opt out.
- reforms to the state system to ensure a sound foundation on which pension saving can build. These involve a gradual move towards a more generous state pension with the state pension age also increasing over the long-term. In essence, this would mean a higher pension at a later age.
- measures to improve the position of people with interrupted work records and caring responsibilities, who are disadvantaged by the existing contributory system.
- measures to facilitate later working and flexible retirement for those who want it.
National Pensions Savings Scheme
The design of the National Pensions Savings Scheme aims to encourage people to save for retirement and enable them to do so at low cost, according to the Commission.
Provisions of the recommended scheme include:
- automatic enrollment, but with the right to opt out
- minimum default employee contribution rates of 5% of gross pay above £5,000, of which 1% is effectively paid by tax relief
- required employer matching contributions of 3%
- ability of both employers and employees to make additional voluntary contributions
- ability of the self-employed to join the scheme voluntarily.
The Commission said in its report that the Annual Management Charge of the new scheme should be 0.3% per year or less. It recommends a national payment collection system to collect contributions in a cost-effective and administratively non-burdensome fashion and investment options for members in very low cost funds bought in bulk from the fund management industry to keep the charge low.
Accounting firm Deloitte & Touche had criticism for the Commission’s recommendations. The firm says recommendations of the Pensions Commission, if implemented, would put as many as 50,000 life and pensions jobs at risk and cost UK businesses£4 billion a year in the short term, according to AFX.
Deloitte estimates that the life and pensions industry could expect to lose up to 30% of its revenue if the proposed changes are implemented. In addition, Mark FitzPatrick, head of the insurance practice at Deloitte said, “This could also have a knock-on effect on their ability to offer other capital intensive savings and protection products such as annuities.”
FitzPatrick believes a more effective model would be to administer the proposed national pension savings scheme through the life and pensions industry since “‘This group have the existing expertise and infrastructure in place to effectively administer the program, which would enable the government to introduce the national pensions saving scheme much more quickly.”
For employers, AFX reports that David Robbins, a partner in consulting at Deloitte, says the National Pensions Savings Scheme will add an additional cost burden since they are already meeting the costs of closing the gaps in their own savings schemes. He said employers may limit future salary increases to make up for the additional costs.
In addition, Robbins said, “Based on the Australian experience, we might expect some UK companies to consider closing their occupational pension schemes in favor of contributing to personal accounts. A three percent contribution is a lot lower than the level typically paid by an employer into a good company pension scheme and the proposals may therefore act to reduce the amount of pension savings for some groups of employees.”