Article date: 27 March 2003
“The magnitude of change needed for the Government toachieve its aims will come with a hefty price tag. We estimate thatthe cost of implementing these current proposals will besubstantial. Crucially, however, the proposals as they stand alsolack the benefits needed to justify such significant costs thatultimately would have to be borne by the consumer.
“The principle of simplification is very muchsupported but will only succeed alongside further measures thatencourage people to save. We look forward to working in partnershipwith the Government and regulators to develop and improve theproposals within a realistic and achievable timetable. However, aswith any partnership, the needs of both parties should be accountedfor.”
Philip Scott Executive Chairman Norwich Union Life
Norwich Union has submitted a combined response to the PensionsGreen Paper and Inland Revenue taxation reviews.
The key themes of Norwich Union’s response are:
1. COST OF IMPLEMENTATION
2. PRICE CAP
4. TAX SIMPLIFICATION
5. RETIREMENT FLEXIBILITY
1. COST OF IMPLEMENTATION
We are concerned that the current proposals will burdenproviders with a great deal of additional work and expense. Newinfrastructure will be needed. Significant changes to computersystems will have to take place. There will also be the need foradditional communications to pension savers to explain the changesto them. All of this will involve significant investments of bothtime and money. All of this at a time when capital, given thecurrent market, is scarce.
Ultimately these costs will have to be passed on to theconsumer. Therefore, there needs to be more of a balance inresponsibility and costs between the Government and providers.
As a leading pension provider, we want to work in partnershipwith the Government to achieve solutions that deliver increasedpension savings in a cost-effective way. However, we cannot supportchanges that fail to offer the right balance between the cost ofachieving and the benefits of delivery.
The proposals need to deliver more tangible benefits in a numberof areas to take account of our concerns regarding costs.
2. PRICE CAP
There must be a re-consideration of the 1% price cap onstakeholder pensions, in order to enable mass-marketdistribution.
Products must be not only attractive to buy, but also attractiveto sell. We are keen to work with the Government in exploringdifferent price caps or pricing structures for simplified productsto deliver a balanced outcome for both consumers and theindustry.
In addition, the Government should consider the lack ofincentive to providers in extending their current role asadministrators. If providers do have more onerous responsibilities,such additional work should be taken into account when consideringthe charges that providers can make.
We believe that the proposals do not deliver the necessaryincentives for both individuals and employers.
Incentives For Individuals
- State benefits and means testing - We would have liked tosee a thorough review of state benefits and their interactionwith private pensions. Currently this interaction is overlycomplicated. People are more likely to save if they have a betterunderstanding of what state pension they will get, and haveconfidence that any private pension will pay out in addition totheir state pension.
We consider the greatest disincentive to the target group isthe operation of means-tested benefits. These serve as adisincentive to saving and unnecessarily complicate advice onprivate pension provision. Even with the Pensions Credit, saverswill not fully benefit from their financial prudence. Advice iscomplicated because there is a lack of a discernible point atwhich it is in the person’s interest to save privately fortheir pension. An accusation of ‘mis-buying’ for thesector is a very real threat. Moreover, we do not believe afuture where 82% of the population are projected to be on meanstested benefits by 2050* is desirable or sustainable.
- Lifetime limit - We support and understand the idea ofa lifetime limit on pensions for the purposes of tax relief,however, we believe that this should be linked to contributions,not investment performance. Otherwise situations could arise wherepeople are penalised for making good investment choices. Thatwould be unfair to consumers.
- Contracting out - We believe that contracting outshould either be abolished or the terms on which the NationalInsurance rebates are calculated should be changed to reflect therisks involved in contracting out. Unless the rebates areimproved, people will increasingly be advised not to accept therisk of contracting out and remain in the State Second Pension or,if already contracted out, to re-join it.
Incentives For Employers
In our view, the role of employers is key in narrowing theSavings Gap. Employers need financial incentives to encourage themto establish, contribute to and deliver information about pensionsaving. Such incentives could include:
- Additional National Insurance credits for employers whocontribute to pension schemes,
- Additional Corporation Tax relief for employercontributions.
4. TAX SIMPLIFICATION
We welcome the simplification of the tax regime. We accept thatachieving this radical approach will mean there are winners andlosers. However, we consider that the proposals can be simplifiedfurther by taking a more risk based approach to tax avoidance,particularly in relation to the checking and reporting required bypension providers.
5. RETIREMENT FLEXIBILITY
We support the removal of the retirement ‘cliffedge’ and further flexibility in the retirement market. Weagree that this ‘cliff edge’ is damaging both to theeconomy and the well being of individuals who wish to remain activeand employed.
However, we believe the proposals could go further. Forexample:
- A level playing field between annuities and drawdown,
- Further flexibility for annuities should be considered,
- Money-back options should not be limited to age 75.
Implementing the Inland Revenue changes by April 2004 isunachievable. The Department for Work and Pensions (DWP)implementation dates are not clear from the paper, but we assume apiecemeal approach over the next three years.
Our view is that a piecemeal approach to implementation willconfuse consumers and unnecessarily increase the cost of achievingthe changes. A single implementation date, with a furthertransitional period to allow for settling in, should be consideredfor both the Inland Revenue and the DWP proposals.
We recommend that implementation is deferred until April 2005 atthe earliest. As long as full and firm details are known by the endof 2003, then April 2005 is the earliest possible implementationdate.
We also urge the Government to give the changes a chance oncethey have been implemented by committing to a moratorium on furtherfundamental change of at least 5 years.
Further commenting, Philip Scott said: “Research bears outthat most people are consumed by “living for today and forgetabout tomorrow”. Looking around, it is not difficult for usto see why this attitude of “live now, pay later”prevails. There are so many temptations and so many demands onpeoples’ money. However, investments, life insurance andpensions should feature in many households' regular expenditure,like mortgage payments currently do.
“Only three parties can physically contribute to a pensionand, therefore, help narrow the Savings Gap - employers, theGovernment and consumers. However, providers like Norwich Union cando a great deal to make it easy and affordable for more people tosave via a pension – if the environment is right.
“Our response contains a raft of detailed recommendationsfor change.”
Press office contacts:
James Evans 08703 66 68 78
07790 487105 Out of office hours
Ian Beggs 08703 66 68 71
07790 487 533 Out of office hours
Louise Goffee 08703 66 68 70
07810 057362 Out of office hours
NOTES TO EDITORS
* The Institute of Fiscal Studies.
- Norwich Union is the UK’s largest insurer. It is aleading provider of life, pensions and investment products and oneof the leading IFA providers. IFAs provide around 75% of thecompany’s long-term savings business.hours
- Norwich Union has strategic alliances with building societiesand other leading UK brand names including Tesco Personal Financeand The Royal Bank of Scotland Group.hours
- Norwich Union’s news releases are available on the Avivaplc website at www.aviva.comhours
- A selection of images are available from the Norwich UnionNewscast site at www.newscast.co.uk