UK think tank criticises expense of flat-rate pension reform

UK - A UK think tank criticised government proposals to introduce a flat-rate state pension, arguing it would not encourage higher levels of pension saving.

The reforms, supported by the National Association of Pension Funds (NAPF), would see the introduction of a flat-rate payment worth around £140 a week, with the aim of reducing dependence on additional benefit payments.

In a report by think tank Reform, co-founded by Conservative MP Nick Herbert in 2002, it points to trends in New Zealand, where the introduction of similar reforms did not provide a "silver bullet".

The report states: "The universal pension is a major reason for the low household savings rates in New Zealand. Incentives to save are reduced when people know they will receive a benefit even if they make no preparation for their own retirement."

Reform further argued in its report, titled 'Old and Broke: The long-term outlook for the UK's public finances', that it would significantly increase exchequer expenditure by £11bn in 2016-17, the earliest likely launch for the new system.

However, the predictions contradict Pensions Policy Institute calculations that estimate the reform would be cost neutral compared with the expense of maintaining the current system, while the NAPF has argued a predictable state pension payment would offer incentives for individuals to save for retirement.

The report went on to criticise the National Employment Savings Trust's (NEST) role within upcoming auto-enrolment reforms, arguing that it stands to gain an unfair advantage over private providers and saying that its establishment should be reversed.

"The use of NEST could also have a negative effect on member engagement (due to its automatic nature) and mean that members fail to maximise their retirement incomes," the report argued, adding that NEST's position in the market would inhibit private companies' ability to cross-sell other products, such as long-term care, to its members.

"Engaging a range of competing private sector providers, where private sector disciplines and a plurality of providers could be engaged, would reduce the risks of the programme considerably," it said, referring to the success of compulsion in other countries, such as Australia, where the Superannuation funds have benefitted from its introduction more than two decades ago.

Asked about the think tank's suggestion to close NEST, its chief executive Tim Jones said: "The scheme will help millions of people who have not saved for their retirement before."