No half measures please, Mr Pickering

Last September, the Department for Work and Pensions (DWP) launched its pensions simplification review, led by Alan Pickering. It aims to provide greater transparency for scheme members and reduce administrative burdens on schemes (OP, July 2001).

We have identified the main areas of concern, as expressed by a cross-section of representative bodies in their responses to the review team's consultation paper. Views on three of the top priority topics are detailed in the table. Below, we look at some other areas addressed by respondents and provide an overview of key submissions.

Common concerns

All the responses covered in this article agree on one point: pension legislation is in urgent need of simplification. In most cases they also concur that changes must be radical to produce a positive result and to reverse the recent trend of rising scheme costs and increasingly burdensome red tape.

The Faculty and Institute of Actuaries, referred to here as the actuarial profession, say, for example: "A radical approach to simplification is required. Further layers of rules on top of existing provisions would create yet more complexity." The Pensions Management Institute (PMI) warns that "without a radical simplification, which is made easy for employers to adopt, this exercise could be counter-productive."

A common point of general concern is that of alignment with other, related reviews currently in progress. The PMI, the Association of British Insurers (ABI), the Association of Consulting Actuaries (ACA), the Society of Pension Consultants (SPC) and the actuarial profession point out that the Pickering review must be coordinated carefully with the Inland Revenue's simplification review of pension tax legislation. They refer to careful timing and to gaining clear agreement between the Treasury and the DWP.

It is common ground that some areas of regulation are ripe for simplification. For instance, contracting out, disclosure Regulations and transfer and preservation rules all prompt strong opinions (see table for details).

Responses to simplification review consultation paper

Section 67

Section 67 of the Pensions Act 1995, which protects accrued rights when changes to schemes are contemplated, has attracted a great deal of comment and is generally held to be a high priority for reform. This provision causes considerable difficulties for schemes seeking to make changes.

The actuarial profession, the ACA, the NAPF, the PMI and the SPC all call for change in this area. In summary, they would like to see s.67 removed and replaced with a more flexible regime, while still protecting key member entitlements.

The actuarial profession suggests replacing it with a "test of value", rather than an absolute guarantee of no worsening of benefits, while the NAPF believes existing trust law is in any case a duplication of s.67. The PMI says the concept could be replaced with a statement of principles, and the SPC says a requirement to preserve the overall value of the accrued benefit package should suffice.

The regulatory role

The role of the Occupational Pensions Regulatory Authority (OPRA) comes under close scrutiny in several submissions, highlighting dissatisfaction with the regulator's "tick-box", reactive approach. The NAPF calls for more flexibility generally in the regulation of schemes, pointing out that "mistakes will happen". It gives examples of large fines having been imposed that are out of proportion to the loss to members or the seriousness of the breach in question.

The ACA calls for a regulator that can exercise more judgment and a common-sense approach. The Industrial Society suggests that it would be less onerous for schemes if they had to submit an annual return to OPRA, rather than being subjected to a regime that relies on arbitrary whistleblowing.

Pension sharing on divorce

Almost all respondents in our research call for simpler rules surrounding pension sharing on divorce. The PMI, the SPC and the actuarial profession suggest that trustees could have the power to transfer any credit to a stakeholder scheme without the ex-spouse's consent.

The PMI also suggests that earmarking could be applied to lump sums on death alongside pension sharing. The actuarial profession recommends dispensing with a number of sections of the Pension Schemes Act 1993 relating to safeguarded rights, pension credit rights and transfers of pension credit rights.

AVCs and stakeholder

Many organisations call for the abolition of the compulsory provision of additional voluntary contributions (AVCs), now claimed to be outmoded by stakeholder pensions, which allow policyholders to receive a tax-free lump sum on retirement.

In conjunction with this, some bodies suggest revising the restriction on who can pay concurrently into a stakeholder pension. This option is only open to those earning £30,000 a year or less, so prevents higher earners using stakeholder schemes as an alternative to AVCs.

Response from the NAPF

The NAPF's response begins by stressing the importance of clarity when drafting legislative changes following the review. It recommends including a clear "purposive first clause", not unlike the objectives set out by the Financial Services and Markets Act 2000.

It also stresses the importance of plain English. As a key issue, the NAPF recommends identifying and eliminating areas of what it regards as regulatory duplication. It points to other regimes where similar laws may exist, such as corporate, employment, EU, investment, tax and trusts. The association's views on disclosure and contracting out are also singled out as being high on the agenda.

Response from the actuarial profession

The actuarial profession points out that there are likely to be some "losers" as a result of the review. It recommends that a "long compliance lead-in time" would help alleviate such problems. Their submission also highlights the importance of protecting members: "Member protection is fundamental and the principles underlying this need to remain firmly in place."

Like the NAPF, the actuarial profession cites contracting out and s.67 as top priorities. It lists seven other areas for change, including the interaction of occupational schemes with state benefits, where it sees a need for simplification of the pension credit and indexation, and recommends the abolition of limited price indexation. It also calls for more flexibility surrounding the regulation of member-nominated trustees, so employers and trustees can adapt more easily to changing circumstances.

PMI response

The PMI recommends that any legislative changes should be retrospective, or "better still, get rid of laws altogether". It says that legislation is customarily written in an outdated style and needs a rewrite in modern, simple English. "For most, interpretation has become a nightmare," the preamble says. The pensions body lists as priority items for simplification: anti-franking (legislation to protect members' index-linked GMP rights), member-nominated trustees, scheme modification and reconstruction, and winding up.

Recommendations include the abolition of the law relating to anti-franking for contracted-out salary-related schemes, and the replacement of existing law on member-nominated trustees with a simple statement, saying that "at least one-third of the trustee body in non-exempt schemes must be nominated by members".

Response from the SPC

The SPC submitted an initial response to the simplification review in November 2001 and a supplementary paper earlier this year. Much of this is taken up with four key areas of concern: s.67, contracting out, transfers and preservation, and disclosure. It also includes comments on pension sharing on divorce, AVCs, personal pension contribution monitoring, and internal dispute resolution procedures.

Regarding the last of these, the SPC suggests a review of whether the administrative costs imposed by the current requirements give proportionate benefit to members. It recommends abolishing all the current detailed requirements and substituting a simple requirement that schemes identify a person to whom complaints can be referred. If after a certain period the complainant remains dissatisfied, they could then take their case to the Pensions Ombudsman.

TUC response

The TUC argues the case for compulsory employer contributions to all pensions, including stakeholder. It calls for the strengthening of Regulations around member-nominated trustees, to ensure the role is protected, and for continued support for trustee education, so the Myners recommendations can be implemented without threatening member participation in scheme governance.

To reverse the retreat from final-salary schemes, the TUC wants to see simplification of legislation surrounding defined-benefit pensions, including a review of the accounting standard FRS 17, but it stresses that members must be no worse off as a result. Lastly, to encourage more employees to join pension schemes, the TUC believes education and awareness will have to play a large part if simplification is to be successful.

ABI response

The ABI's response includes 27 recommendations covering 10 broad areas. As a general point, it recommends that significant losers from the Pickering review could be compensated by government, and/or transitional measures considered to ease any loss, particularly for those approaching retirement.

A key consideration for the ABI is the simplification and accessibility of the advice and sales process. In order to enable more people to have access to reliable pensions advice, it seeks government approval for a proposed two-tier advice system. As part of this, it envisages a regime with a "lighter touch" for simpler products, including stakeholder pensions and group personal pensions, which would have less costly, generic advice at its core. As part of its proposals, it hopes to find ways of involving employers more closely in the facilitation and provision of advice.

Industrial Society response

The Industrial Society takes the view that the UK pension system is currently "wasteful", and extremely expensive to run by international standards, because it allows for so few economies of scale. The society calls for greater partnership between those involved in pension provision, and more standardisation of benefits, communication and administration.

Some of the Industrial Society's more radical ideas include the promotion of industry-wide schemes, and a more ambitious combined benefits forecast. In respect of the latter, it refers to a Danish internet site, where any individual can get figures for their entire pension entitlement, including state benefits, current scheme, and deferred rights.

The Industrial Society is strongly influenced by research into other pension systems. "We need to learn from research and from other countries' innovations, rather than assume we know best," concludes Yvonne Bennion, the Industrial Society's policy specialist.