Norwich Union has submitted a combined response to the Pensions Green Paper and Inland Revenue taxation reviews.
“The magnitude of change needed for the Government to achieve its aims will come with a hefty price tag. We estimate that the cost of implementing these current proposals will be substantial. Crucially, however, the proposals as they stand also lack the benefits needed to justify such significant costs that ultimately would have to be borne by the consumer.
“The principle of simplification is very much supported but will only succeed alongside further measures that encourage people to save. We look forward to working in partnership with the Government and regulators to develop and improve the proposals within a realistic and achievable timetable. However, as with any partnership, the needs of both parties should be accounted for.”
Philip Scott Executive Chairman Norwich Union Life
Norwich Union has submitted a combined response to the Pensions Green Paper and Inland Revenue taxation reviews.
The key themes of Norwich Union’s response are:
1. COST OF IMPLEMENTATION
2. PRICE CAP
3. INCENTIVES
4. TAX SIMPLIFICATION
5. RETIREMENT FLEXIBILITY
6. TIMETABLE
1. COST OF IMPLEMENTATION
We are concerned that the current proposals will burden providers with a great deal of additional work and expense. New infrastructure will be needed. Significant changes to computer systems will have to take place. There will also be the need for additional communications to pension savers to explain the changes to them. All of this will involve significant investments of both time and money. All of this at a time when capital, given the current market, is scarce.
Ultimately these costs will have to be passed on to the consumer. Therefore, there needs to be more of a balance in responsibility and costs between the Government and providers.
As a leading pension provider, we want to work in partnership with the Government to achieve solutions that deliver increased pension savings in a cost-effective way. However, we cannot support changes that fail to offer the right balance between the cost of achieving and the benefits of delivery.
The proposals need to deliver more tangible benefits in a number of areas to take account of our concerns regarding costs.
2. PRICE CAP
There must be a re-consideration of the 1% price cap on stakeholder pensions, in order to enable mass-market distribution.
Products must be not only attractive to buy, but also attractive to sell. We are keen to work with the Government in exploring different price caps or pricing structures for simplified products to deliver a balanced outcome for both consumers and the industry.
In addition, the Government should consider the lack of incentive to providers in extending their current role as administrators. If providers do have more onerous responsibilities, such additional work should be taken into account when considering the charges that providers can make.
3. INCENTIVES
We believe that the proposals do not deliver the necessary incentives for both individuals and employers.
Incentives For Individuals
- State benefits and means testing - We would have liked to see a thorough review of state benefits and their interaction with private pensions. Currently this interaction is overly complicated. People are more likely to save if they have a better understanding of what state pension they will get, and have confidence that any private pension will pay out in addition to their state pension.
We consider the greatest disincentive to the target group is the operation of means-tested benefits. These serve as a disincentive to saving and unnecessarily complicate advice on private pension provision. Even with the Pensions Credit, savers will not fully benefit from their financial prudence. Advice is complicated because there is a lack of a discernible point at which it is in the person’s interest to save privately for their pension. An accusation of ‘mis-buying’ for the sector is a very real threat. Moreover, we do not believe a future where 82% of the population are projected to be on means tested benefits by 2050* is desirable or sustainable.
- Lifetime limit - We support and understand the idea of a 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 where people are penalised for making good investment choices. That would be unfair to consumers.
- Contracting out - We believe that contracting out should either be abolished or the terms on which the National Insurance rebates are calculated should be changed to reflect the risks involved in contracting out. Unless the rebates are improved, people will increasingly be advised not to accept the risk 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 the Savings Gap. Employers need financial incentives to encourage them to establish, contribute to and deliver information about pension saving. Such incentives could include:
- Additional National Insurance credits for employers who contribute to pension schemes,
- Additional Corporation Tax relief for employer contributions.
4. TAX SIMPLIFICATION
We welcome the simplification of the tax regime. We accept that achieving this radical approach will mean there are winners and losers. However, we consider that the proposals can be simplified further by taking a more risk based approach to tax avoidance, particularly in relation to the checking and reporting required by pension providers.
5. RETIREMENT FLEXIBILITY
We support the removal of the retirement ‘cliff edge’ and further flexibility in the retirement market. We agree that this ‘cliff edge’ is damaging both to the economy and the well being of individuals who wish to remain active and employed.
However, we believe the proposals could go further. For example:
- 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.
6. TIMETABLE
Implementing the Inland Revenue changes by April 2004 is unachievable. The Department for Work and Pensions (DWP) implementation dates are not clear from the paper, but we assume a piecemeal approach over the next three years.
Our view is that a piecemeal approach to implementation will confuse consumers and unnecessarily increase the cost of achieving the changes. A single implementation date, with a further transitional period to allow for settling in, should be considered for both the Inland Revenue and the DWP proposals.
We recommend that implementation is deferred until April 2005 at the earliest. As long as full and firm details are known by the end of 2003, then April 2005 is the earliest possible implementation date.
We also urge the Government to give the changes a chance once they have been implemented by committing to a moratorium on further fundamental change of at least 5 years.
Further commenting, Philip Scott said: “Research bears out that most people are consumed by “living for today and forget about tomorrow”. Looking around, it is not difficult for us to see why this attitude of “live now, pay later” prevails. There are so many temptations and so many demands on peoples’ money. However, investments, life insurance and pensions should feature in many households' regular expenditure, like mortgage payments currently do.
“Only three parties can physically contribute to a pension and, therefore, help narrow the Savings Gap - employers, the Government and consumers. However, providers like Norwich Union can do a great deal to make it easy and affordable for more people to save via a pension – if the environment is right.
“Our response contains a raft of detailed recommendations for change.”
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NOTES TO EDITORS
* The Institute of Fiscal Studies.
- Norwich Union is the UK’s largest insurer. It is a leading provider of life, pensions and investment products and one of the leading IFA providers. IFAs provide around 75% of the company’s long-term savings business.
- Norwich Union has strategic alliances with building societies and other leading UK brand names including Tesco Personal Finance and The Royal Bank of Scotland Group.hours
- Norwich Union’s news releases are available on the Aviva plc website at www.aviva.comhours
- A selection of images are available from the Norwich Union Newscast site at www.newscast.co.uk