The announcement today of a review of how best to support the introduction of auto-enrolment into workplace pensions by coalition Minister of Pensions Steve Webb gives a clear indication that the approach to personal accounts is about to be radically changed.
As we explained in a recent white paper, there are some serious issues regarding the whole NEST project and these were not addressed by the outgoing government. To their credit, the new coalition is showing some determination to deal with them.
That this review is happening is hardly a surprise; the shadow minister for Work and Pensions Theresa May was very clear that a review would be launched in the event of the Tories winning power and the Liberal Democrats shadow pensions minister had already shown disquiet at the charging structure proposed.
Given that the contract signed allowed a break point in the autumn, the Minister has moved quickly to set up a review comprising 3 wise men - Paul Johnson of Frontier Economics, David Yeandle OBE of Engineering Employers Federation and Adrian Boulding of Legal and General Group PLC. This group is tasked with conducting this review within 3 months in order to ensure that any recommendations can be considered prior to the break-point; allowing action to be taken.
The programme for government and the budget both emphasised government support for the auto-enrolment approach and it is likely that this aspect of the pension reform proposals will survive. What is not clear is the level of support for the government sponsored NEST programme. This would seem to indicate a desire on the part of the coalition to look to private providers to supply the schemes into which the auto-enrolment can be arranged.
Whether the government will try to control the charging level for these schemes remains to be seen but it is likely there will be a level of charge capping around the schemes. Essentially, the schemes suitable for auto-enrolment could be a group-version of the Stakeholder pension.
This will make it relatively easy for providers to supply the market with a true range of offerings as most insurers have a stakeholder offering already in place and so should drastically reduce the set-up costs involved. It also has the advantage that older joiners would not need to be penalised to cover the start-up costs as was proposed by the NEST programme. Finally, the risk level would be much lower as administration platforms for these products are already in place and all that is needed is to extend these to allow direct employee access.
The fact that the insurers would be providing the pension products will also mean that other savings products could also be encouraged at the same time. For example, ISAs and other offerings could easily be made available to employees thus encouraging the savings culture and allowing optimal tax planning for lower-paid workers who can’t afford the high cost of individual advice.
The government have given the review group the opportunity to enhance the personal accounts system to get the best solution to the pension problem which is threatening the retirement security of the entire population. Let’s hope the wise men consider all the options carefully before choosing which star to follow.