Consultation on Early Access to Pension Savings: Sackers’ Response

Background

We are concerned that HMT’s consultation on “Early access to pension savings”, published in December 2010, is unduly negative towards the idea of allowing early access to pensions savings. As the consultation makes clear, recent levels of pensions saving have been too low, particularly given increases in longevity. We are of the view that any initiatives which may encourage pensions saving (or saving in general) are to be encouraged and considered further.

Although the Consultation suggests that there is likely to be only limited take up of early access options, as the people most in need of early access actually have very limited, if any, savings at all – including pensions savings. However, we wonder whether the constituencies most likely to benefit from this easement are likely to be:

• middle income families, who are also the target audience for auto-enrolment and NEST. This group may for the first time start to build up significant pension savings as a result of auto-enrolment. It is also this group who may be discouraged from further pension saving (or may choose to opt-out of NEST altogether) if they feel they could not access those savings in times of financial hardship.
• younger employees, who are likely to be balancing repaying student debt and getting on the property ladder with longer term saving.

We understand there are four main options under active consideration:

• Loan model – allowing individuals to borrow from the fund;
• Permanent withdrawal model – allowing access to funds without repayment obligations;
• Early access to the 25% pension commencement lump sum; or
• A feeder fund model – creating a more flexible linked saving environment with other products such as ISAs.

Our view is that either the loan model or an arrangement of feeder (or complementary) funds to pensions funds are likely to be the most effective.

In this response:

• Loan Model
  
• Feeder Funds
  
• Communications with Members
  
• Appetite for change

Loan Model

This model allows individuals to borrow from their fund is likely to have two key advantages:

• it allows flexibility but does not permanently diminish the size of the fund, provided the loan is repaid; and
• it may be the easiest to set up and operate, as it could be modelled on the student loans repayment scheme.

The main question is how interest would be allocated. We assume that this would be essentially paid by the member to their own fund (minus an administration charge). This would in a sense compensate them for the loss of investment on their funds.

Feeder Funds

Anecdotally, we are aware of demand for a more flexible savings regime in the workplace – of which early access could be a constituent part. For example, we are aware of at least one employer which already offers saving products, such as ISAs in addition to pension saving as part of a flexible savings package – targeting short, medium and long term saving. The employees are a financially sophisticated audience and the arrangement has been set up in response to recruitment and retention needs.

Communications with Members

Communicating the options available to scheme members is likely to be the most problematic element of provision. At a later stage in the consultation process it may help for this issue to be tackled directly either by guidance or standard form communications.

Appetite for change

As we mention above, we anticipate that larger companies may wish to explore early access options as part of a flexible remuneration and savings package. We also anticipate providers would wish to offer such products.

However, of course, it would not be suitable for all companies, nor all members of pension schemes. There is an analogy to be drawn here with income drawdown, which may expand once the requirement to buy an annuity at age 75 is withdrawn. It is not compulsory for occupational pension schemes to offer income drawdown, nor for members to take advantage of it. In a similar way, provided the legislation was drawn in such a way to facilitate change for those that want it, we believe it would be a very positive development.

Change is on its way in respect of compulsory annuitisation at age 75 and so it would be appropriate to mirror this for younger people with early access to pension schemes.