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UK’s Turner proposes funded national scheme

UK – Lord Turner’s Pension Commission has proposed the introduction of a funded national pension scheme with individual accounts, modelled in part on the Swedish PPM system.

The idea has met with a mixed response from commentators and industry bodies.

Contributions to the proposed National Pension Savings Scheme, which would feature auto-enrolment, would be held in individual accounts and invested in a range of funds.

These funds would be bought in bulk from the wholesale fund management industry, with a default fund for those who make no selection.

The report said the Swedish Premium Pension Scheme is an example of this type of system, although it is compulsory rather than auto-enrolled.

But the NPSS would differ from the PPM in that the scheme would negotiate fund management mandates covering major asset classes – it puts the number at between six and 10 – with very low fees but large volumes.

The Swedish system has a potential choice of 700 funds, which the Commission says is too much.

Turner says the proposed funds could form the totality of the NPSS system or could be combined with other funds. This would allow members to invest in alternative asset classes such as private equity and hedge funds.

Allocations could be changed on an annual or semi-annual basis. The default fund should be lifestyle-smoothing fund, shifting members from equities to bonds over time.

The Investment Management Association said the NPSS is “a potentially powerful and exciting idea” – although work was needed on the detail.

“If introduced properly the scheme could bring about a real increase in the levels of saving, reaching those who currently do not save for their retirement.” But it was important to ensure that the scheme did not hit the existing savings market.

But the National Association of Pension Funds said the scheme “could lead to a reduction in pension benefits for millions of Britons,” as it would expose people to too much investment risk.

Donald Duval, chief actuary at Aon Consulting, said the NPSS was “a bad idea”, saying the government was not good at picking investment managers. He said: “The government’s choice of investment will lose far more than would be saved in charges.”

Turner proposes a winding-down of the state’s role in pay-as-you-go provision.

The report says PAYG expenditure “should in the long-term be concentrated on securing as generous and as non-means-tested flat-rate state pension provision as possible, with the state withdrawing gradually from its role in PAYG earnings-related pension provision as the NPSS provides a proven alternative earnings-related system”.

The report has been top news in the UK, with a political row already developing about proposals about compulsion and the state pension age.

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