Turner Report - National Pension Savings Scheme

Today Adair Turner's pensions commission recommended the government set up a National Pension Savings Scheme that employers and employees would contribute to.

Employees would be automatically enrolled in such a scheme or a similarly highly-rated company pension plan – although they would be given the option to opt out - with money collected automatically from salaries.

Contributions would be four per cent of salary, with employers adding another three per cent and the government chipping in with one per cent more.

The scheme would be owned by the employee, who could take it with them from job to job and choose what sort of funds it is invested in.

The idea would be to use inertia to get workers saving, and by creating a national scheme, management costs could be kept to as little as 0.3 per cent.

This could add as much as 25-30 per cent to pensions funds on retirement when compared with a scheme with an annual management charge of 1.3 per cent, which is typical currently.

But the plan has proved controversial, drawing praise from unions and widespread condemnation from employers.

Additionally, the National Association of Pensions Funds (Napf) has warned that by forcing employers to contribute three per cent of their salary to a pensions scheme could lead companies to ditch their own, more generous, schemes or to drop their contribution levels to ones similar to the National Pension Saving Scheme.

"We are concerned that the [pensions] commission’s proposal for a National Pension Saving Scheme exposes individuals to too much investment risk and that the commission is too complacent over the potential levelling down impact on existing workplace schemes," said Napf chief executive Christine Farnish.

"This is particularly the case given the recommendation that acceptable alternatives to National Pension Saving Scheme must have auto enrolment. This will place significant costs on schemes – currently only 38 per cent of Napf members (which comprise some of the best run and most generous occupational pensions in the UK) have auto-enrolment. In the face of increased cost pressures, many employers may cease offering an occupational scheme and opt for a lower quality National Pension Saving Scheme instead.

"There is a very real danger that, in proposing new savings options to a wider constituency, the commission’s proposals would throw the baby out with the bathwater.

"A better approach is one built more directly around employers where employers are required to join a master trust arrangement with high standards of governance to protect scheme members and low costs. Employers should then be incentivised to contribute to these arrangements on behalf of their workers."

There were also questions on how tightly-stretched firms could afford the compulsory contributions they would be required to make.

Carol Undy, national chairman of the Federation of Small Businesses (FSB), said: "The proposed three per cent compulsory employer contribution will be a tax too far for small businesses. The bottom line is that most small employers simply cannot afford it and would be forced to make damaging cuts in other areas.

"The FSB recognises the need to tackle the pensions crisis and we welcome the current debate. But shackling small firms, the drivers of economic growth, with extra expense is not the answer."

Economists have also expressed concerns.

Douglas McWilliams, chief executive of the centre for economics and business research, likened a four per cent contribution from employees and a three per cent contribution from employers to an increase in national insurance.

"Turner’s proposed effective seven per cent hike in national insurance contributions could knock nearly £2 billion off GDP from the impact of reduced competitiveness over five years after it comes in," he said.

"Meanwhile, the prospects of much more savings to be invested will affect the City and the future of fund management. We expect that ultimately there will be some consolidation into a number of superfunds."

But unions, by contrast, believe the measures do not go far enough.

Public sector union Unison called for a far higher level of contribution from employers.

Unison general secretary Dave Prentis commented: "There are some parts of the report that could have gone further. If a national savings scheme were introduced then employers should be made to pay more than three per cent.

"We think that employer’s contributions should be ten per cent. An employers’ rate of three per cent would not provide an adequate pension for the low paid, especially part-time women workers."