THE ABI tomorrow publishes proposals for new Partnership Pensions to turn [Lord] Adair Turner [of Ecchinswell]’s vision of low-cost and simple private pensions into reality. The pensions industry has delivered on our promise to produce a viable alternative to the Pensions Commission’s national pensions savings scheme.
For savers, we propose a new system of portable personal accounts that can stay with individuals throughout their working lives. We plan to make pensions cheaper and simpler, with better arrangements for transfers between providers and an easy electronic collection process. For ABI member companies, our proposals mean working with a radical new business and regulatory model. For Britain they offer a chance to set a new course in pension provision. Much of Britain’s savings gap is among lower and middleincome households. To meet their needs, we have pressed for a new pensions settlement based around the workplace — with auto-enrolment, matching employer contributions and reform of the state pension system to reduce the disincentive to save of means-testing.
In its report last November the Commission backed up this analysis and supported many of these proposals. It also proposed a new system of national pensions administration, the NPSS, creating fears that a new state quango would be taking on unacceptable risks and liabilities, and that ministers would soon be commissioning yet another expensive IT project.
The Government would be right to turn to the private sector to take on this task. The administrative infrastructure is largely in place; the industry has the necessary expertise and experience; and our member companies are keen to serve non-savers in small companies and among the self-employed, who have hitherto been difficult and expensive to reach.
The private sector has other advantages as well. It can move more quickly than the state. Competition between providers will drive costs down and the industry’s marketing will help to promote a higher level of take-up and saving. And competition will also provide the customer with choice between providers, helping to drive up service quality and investment performance.
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Much of the public debate has focused on charges. Under current industry and policy models, regulation, marketing and distribution costs have put a floor under the industry’s drive to reduce prices.
Yet work by Deloitte for the ABI has shown that auto-enrolment with matching employer contributions will dramatically alter the economics of private pension provision. Deloitte calculates that the Commission has underestimated the true costs of its model by 50 per cent. The suggested 0.3 per cent annual charge figure is certainly not a central estimate. The Commission has assumed that experience of serving the more affluent will be repeated when serving low earners.
The Deloitte work shows that the ABI’s Partnership Pension model will cut private sector costs by about half. Experience from Sweden and elsewhere suggests that these are realistic estimates.
We also know from our work that the private sector has lower set-up and running costs, at least for the first ten years. Any extra cost in the longer term, if not competed away, will have only a trivial impact on income in retirement. And it is justified by gains in participation and savings, and by falls in the liability that will be incurred by the taxpayer under the NPSS.
All the numbers being calculated at present are provisional. Actual costs will depend on government and regulatory decisions, as well as how people respond to the new system. It will also be important, as Partnership Pensions are introduced, to ensure that existing saving is not eroded, and there is no rush out of existing good schemes into a system with lower employer contributions.
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To deal with both of these uncertainties, we propose that the Government establishes an independent economic regulator to advise on costs and charges.
In a few weeks the Government publishes its White Paper. A good outcome would build on the best of Turner’s ideas and industry expertise.
The author is ABI director-general