Charges fiddling whilst low earners’ pensions burn

The Pensions Bill makes a reappearance in Parliament today after the summer recess. Greg McClymont, the shadow pensions minister, is still concerned with getting amendments made which will force providers to disclose the whole of the charges to the pensions customer including all the little investment nuances. And Steve Webb will tomorrow publish his reply to the OFT report, calling for a 0.75% charging cap for workplace pension schemes to attack ‘the scourge of high charges’.

Now, don’t get me wrong. Low and transparent charges are important to the success of automatic enrolment and pensions, and these guys are right to be waging this particular war. I get all that.

But.

The PPI has over the last couple of weeks published some interesting stuff about how people can get an adequate pension in retirement. And what has struck me is the importance of the triple lock guarantee for state pensions. For example, one chart shows that for a lower earner the probability of getting an adequate retirement income from private and state pensions is 63%. But if the triple lock guarantee gets replaced by linking the state pension only to earnings, then that probability plummets to a mere 36%.

Yep, down from 63% to 36%. Slashed.

Another chart shows if someone wanted to replace two thirds of their income using a traditional lifestyle investment fund, then, assuming 0.5% amc and that the state single tier pension has the triple lock, they would need a 11% contribution rate.

Change that to 1% amc and the contribution rate needed understandably goes up to 12%.

But change the triple lock guarantee to earnings linked only and the contribution rate goes up to 14%.

Concluding that the triple lock guarantee is way more important than charges. But so far, no political party has committed to continuing with the triple lock guarantee in the next parliament.

So, pension politicians. Yes, carry on with your crusade to get low and transparent pension charges because it is important. But please can we shift the focus and also include the triple lock guarantee. Let’s get their promise that the triple lock guarantee will be there after 2015. Because that will make the all important difference in making sure lower earners (and everyone else) get an adequate income in retirement.

A disaster for Nest?

If automatic enrolment was a marathon (and it certainly isn’t a sprint), we would be hitting the four mile mark around about now. And so far, so good. Everything seems to be going swimmingly. Employers have planned, implemented, and complied – with the help of their HR department, consultants, and advisers. The incredibly low opt out rate of 10% is dazzling. Steve Webb  and his DWP gang must be leaning back with a smile on their faces.

This week we learnt Nest has signed up 100,000 members. Great news. But not as good as the 250,000 members Legal & General have signed up to their master trust. Despite Nest insisting all is OK, and it is on track to meet its grand masterplan, some are saying this is a disaster for the Government-sponsored scheme and action needs to be taken quick. That action being to remove the transfer ban and contribution limit.

Excuse me if I don’t join in this wringing of hands in despair, but I don’t think this is a major catastrophe. Nest was set up with a very specific purpose. To help the employers the rest of the market couldn’t – or wouldn’t want to – reach. (And not necessarily to provide the cheapest charges as some have argued.) So far we are only at the beginning of automatic enrolment, and the schemes up for grabs have been provided by big multinational employers. The sort of employers almost all providers are happy to ‘reach’ and have on their books.

Roll on 18 months, and I can guarantee that the member numbers on Nest’s book will be swelling, whilst L&G (and other providers) will have withdrawn somewhat from the fray and the fighting for schemes.

So to talk about disaster and removal of limits is premature. It may be that the transfer ban has to be lifted to implement the automatic transfer of small pots. But it shouldn’t be removed purely because Nest hasn’t secured as many big schemes as it wanted to. Let it instead start to concentrate on its true market – the small employers who will need every ounce of help Nest and others in the industry can give.