Insurers' fury at pension plan
Government gives backing to Lord Turner's report. Workers will contribute 4 per cent of salary
The Government landed a crushing blow on the British insurance industry yesterday, as it unveiled plans to create a new National Pensions Saving Scheme (NPSS) which will bypass the insurers altogether.
The new proposals, to be implemented in five years' time, are almost identical to the recommendations laid out by Lord Turner's Pensions Commission last year. The news represents a devastating knock-back for the insurance industry, which has spent the past 12 months lobbying Government to adopt a scheme based around the existing occupational pensions framework - which the insurers predominantly administer and manage.
The new NPSS will be centrally administered by a private sector company such as Paymaster or Capita, with all employees over the age of 22 automatically enrolled into the scheme. Workers will contribute 4 per cent of their salary, while employers will be forced to contribute another 3 per cent. Tax relief will make up a further 1 per cent.
Employees will be given a choice of funds - including a range of ethical investments - but those who do not want to make a decision will have their contributions automatically paid into a low-cost default fund.
A dispute over the cost of the new scheme was already beginning yesterday, after the Government said it believed the NPSS would be able to operate with charges of just 0.3 per cent a year in the long-run - in line with Lord Turner's estimates. But it conceded that in the short-term, charges would be more than 0.5 per cent.
The Association of British Insurers said it had serious doubts the proposed system could be run anywhere close to 0.3 per cent. Stephen Haddrill, the director general, said: "We remain concerned that the Government is unrealistic on costs and charges, particularly if it wishes the private sector to offer specialised funds, such as for ethical investment. The [Delivery] authority must be expert and it must consult properly."
Some of the detail of the new scheme - such as the asset allocation of the default fund and the number of external fund options - has been left to a Delivery Authority, to be set up next year.
One positive piece of news for the insurance industry yesterday was the Government's proposal that existing pension savings be barred from transferring into the NPSS. This will ensure the insurers do not lose billions of pounds in transfers.
But the Government also said it intends to set the maximum annual contribution into the NPSS at £5,000 - instead of the £3,000 which it had previously suggested. Philip Hammond, the shadow Work & Pensions secretary, said this would only undermine existing pension savings, ensuring more money was diverted from existing schemes to the NPSS.
Although the Government said it was committed to minimising the impact of the new regulations on employers, it rejected the CBI's suggestion that companies should have a "waiting period" of several months after a new employee starts before they must auto-enrol them into the NPSS. Furthermore, in its Regulatory Impact Assessment, the Government raised its estimates of the costs of the NPSS to employers. In the first year, it now expects the collective cost to be £900m, rising to £2.8bn a year from year three onwards.
Employers will, however, be allowed to phase in the new scheme. They have to contribute only 1 per cent to staff pensions in 2012, rising to 2 per cent in 2013 and 3 per cent in 2014.
The biggest bone of contention over yesterday's reforms remains the conflict the new workplace-based pensions will have with the Government's proposed reforms of the state pension system.
The Government conceded in yesterday's White Paper that "a small group of people - less than 10 per cent of pensioner households in 2050... may not see any benefit from saving". Around 30 per cent of people will still qualify for means-tested Pension Credit by 2050, many of whom will discover that they are little or no better off than people who did not save at all.
David Laws, the Liberal Democrat work & pensions spokesman, said this meant the new system would be "fatally flawed" as long as the Government failed to face up to the problem of means-testing.
"Personal accounts were meant to revolutionise pension savings for people on average and low incomes, but as the Government has failed to curb the growing tide of means-tested benefits, it is clear that for many, personal accounts will be both inappropriate and unfair," he said.
Former pensions minister Frank Field, chairman of the Pensions Reform Group, said he greeted the White Paper with "considerable apprehension", claiming it was likely to encourage employers who currently have good pensions to level down their contributions to the minimum 3 per cent.