National Pension Savings Scheme: Deloitte assesses the impact

Employers look for ways to mitigate the cost of compulsory contributions

ëFloorí of 0.3% in charges could be created for the pensions industry

Some players in the investment management industry could benefit from around 6 billion p.a. of new NPSS funds

In response to todayís third and final report from the Pensions Commission, Deloitte, the business advisory firm, has identified the impact on the investment management and insurance industries as well as employers and employees.

David Robbins, Pensions Partner at Deloitte, comments on the impact on employers and employees: ìCompulsory contributions are likely to cost employers an extra 2.3 billion per annum. Many companies are consequently looking for ways to mitigate this cost. Trends show that employers are already beginning to plan for the future by re-engineering the way that they reward their employees. For example, they are adopting ëflexible benefit schemesí which will absorb the additional pension contributions within the overall employee remuneration package.

ìIn addition, there is the likelihood that employers offering defined contribution schemes will increasingly view pensions in the workplace as a ëhygiene factorí of reward and level contributions down to the mandatory 3%î.

Current occupational pension schemes arrangements at risk:

4.5 million members of private sector schemes currently benefit from contributions which are higher than the proposed new rate of 3%

Average employer contributions are currently 14.5% for defined benefit schemes and 6% in defined contribution schemes

Mark FitzPatrick, Head of the Insurance Practice at Deloitte, went on to comment on the potential impact on the life and pensions industry: ìThe prospects for private pension reform continue to present the life and pensions industry with both opportunities and challenges. Lord Turner has left the door open for further debate on the benefits of using the existing industry infrastructure to deliver reform. The challenge for the industry is to compete on low charges and deliver value to consumers and, ultimately, for the solution to drive personal responsibility. Reform will bring a huge amount of pressure on costs. The NPSS aspires to set administration and fund management fees at 0.3% of funds under management, which could lead existing pension funds to challenge why they are paying considerably more. This could mean that a 0.3% ëfloorí for charges is created.î

The introduction of the NPSS would provide a real opportunity for a small number of players in the investment management industry. David Logan, Investment Management Partner at Deloitte, explained: ìNPSS could create a new, lucrative market for the lucky few in the investment management industry. Around 6 billion per annum of new money could be accumulated by the investment industry. The principal winners will be the companies that win the mandate to manage the default fund. (Looking to the Swedish experience, most pensions end up in the default fund.) It is important to note, however, that NPSS is encouraging low management fees, which suggests that low cost investment vehicles such as tracker funds will be used. This more simplistic model opens up the opportunity to providers outside the traditional active fund management industry.î

John Connolly, UK Chief Executive and Senior Partner, Deloitte said: ìWe welcome Lord Turnerís final report today and see it as a positive step towards ingraining a savings culture in the UK. Following the initial recommendations, it was vital that the industry was involved in the subsequent debate. It was, therefore, extremely positive that industry bodies representing the life and pensions and investment management industries as well as employers were included by Government in the recent rounds of discussions on the future shape of UK pension policy.

ìUntil the White Paper on pension reform is released there is still a great deal of uncertainty about implications for the industry. However, it is highly likely that changes made to UK pension policy over the next few years will have a significant impact.î