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date: 22 June 2010

embargo: For immediate release

Consumers warn ministers over 2012 pension review

Consumer groups have written to ministers at the Department for Work and Pensions (DWP) warning that too broad a review of the 2012 pension proposals would threaten the hard-won consensus for a new system based on auto-enrolment. The text of the letter is:

Dear Secretary of State,

We write to express our view that it would be a mistake to reopen the fundamental building blocks of the 2012 pensions settlement in the forthcoming review.

We of course understand that any new government will want to review the decisions of its predecessor, and we welcome the intention to make it a relatively speedy exercise.

However we understand from Lord Freud's recent remarks in the House of Lords that the scope of the review is not yet decided. Some reports have suggested that it may be a specific review of the operations of NEST and its contractual arrangements, while others have suggested a much more extensive review of many of the provisions contained in the most recent Pensions Act.

We do not believe that NEST has anything to fear from a review of PADA's preparatory work. As we are not party to the commercially confidential contractual details of NEST we have little to contribute to the detail of such a review.

We do however have strong confidence in the work to date of PADA - both its management and board. As you will know the members of NEST will be expected to pay for its operation through its fees - even though it performs an important public policy function - and media reports that talk of the cost of NEST as if it will fall on taxpayers are very unhelpful.

But we are mainly writing to say that we think that it would be a mistake to extend the review in a way that reopens the consensus reached about how best to implement the main recommendations of the Pensions Commission.

This consensus was only secured through much consultation and a great deal of give and take between the various parties involved. Reopening these issues now - before there is any evidence of how employees and employers respond to the plans in practice - could result in the break-up of the wide coalition of support for 2012 and make it much less likely that the reforms attract the millions of new savers that we all want to see.

At the heart of the consensus is the principle of auto-enrolment. It spanned not just the political parties but consumer, employer and industry bodies too. We very much welcome Lord Freud's strong support for auto-enrolment in the recent House of Lords debate.

But auto-enrolment can only work if at least one pension scheme has a public service duty to accept every employer even if they would not make a good business proposition for a commercial provider.

There is consistent clear evidence of market failure in the provision of pensions to those earning median earnings or below, who rarely have access to simple low-cost pensions that reflect their distinct needs and preferences. It is even more important for middle and low income employees that pensions are provided on a low-cost basis so that members can benefit from economies of scale. Nor should we forget the interests of the self-employed who have little or no access to pension schemes with low charges.

In other words if NEST did not exist, then it would need to be re-invented to make auto-enrolment work.

There are many wider aspect of the 2012 settlement that consumer groups accepted very reluctantly. Many of us think that contributions are not high enough. There is concern that the prohibition on transfers in and out will cause difficulties for savers and for NEST. The upper contribution limit makes it hard for NEST to be the pension vehicle of choice for all the staff of organisations including those who are better paid.

But we recognise that other interest groups disagree, and in turn are unhappy with aspects of the settlement that consumer groups applaud.

This is why we think that reopening these issues now could be destabilising. Any changes would require further parliamentary scrutiny and derail industry and employer plans. This would threaten the timetable which has already been delayed to wide disappointment. This would of course not just hit those who would save through NEST, but also the many other staff who would be auto-enrolled into other schemes, whether trust-based occupational schemes or commercial contractual GPPs.

We would similarly counsel against reopening the criteria for auto-enrolment. All efforts so far to identify easily defined groups that would be better off not saving because of the inter-action with means-tested benefits have failed. Older workers saving for the first time may well not build up enough to secure a regular income in retirement, but will still welcome a 'trivially commutated' lump-sum that can help secure the start of their retirement.

Raising the auto-enrolment earnings threshold would discriminate against women and part-time workers. Employees today do not necessarily have steady employment patterns. Even small contributions built up early in a working life when a parent is working part-time to fit in with caring duties can make a significant contribution to post-retirement income thanks to compounding. Persistency in saving is vitally important in building up a decent post-retirement income.

Similarly we think it is hard to make a case for treating the employees of smaller employers differently from those who work for bigger employers. It will not appear fair or just if employees of small firms become second-class pensions citizens. Any cut-off between small and large firms will be arbitrary and would provide a perverse incentive for small employers not to take on an extra staff member that might end their qualification for relief.

Contributions for employers are being phased in. Because contributions are calculated on a band of earnings, the most an employer has to pay by 2016 is 2.5 per cent of salary - and that is only if the staff member earns precisely on the upper earnings band limit. It is less than this for staff earning any more or less than this.

The Pensions Act calls for a review of the operation of many aspects of its proposals in 2017. We recognise that there is a case both for bringing forward that formal review and establishing a permanent Pensions Policy Commission, independent from government, to not just carry out that review but monitor all aspects of pensions provision. But it is our strong view that now is not the right time to reopen the fundamental building blocks of the new settlement.

Yours sincerely,

Caroline Gardner

Financial Services Authority Consumer Panel

Teresa Perchard

Citizens Advice

Nigel Stanley

TUC

Doug Taylor

Which?

Jane Vass

AgeUK

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Press release (1,300 words) issued 22 Jun 2010