Pensions agenda '05

This year is going to be very busy for the pensions industry. Here, six leading figures outline their pensions agenda for a year that will see the launch of the ppf and the new pensions regulator, and probably a general election, in which pensions may well feature.

As in previous years, Occupational Pensions asked six prominent members of the pensions community to outline their pensions agenda for 2005. Taken together, the contributions raise many of the issues with which practitioners will be grappling.

Watershed year for pensions

By Malcolm Wicks MP, Pensions Minister

"As we look forward to the year ahead, 2005 promises to be a watershed for pensions.

With the Pensions Act 2004 now law, measures within this major piece of legislation will come into force to protect people's rights and restore confidence in pensions saving.

One of the most significant measures being introduced by the Act is the Pension Protection Fund (PPF).

From April, for the first time, people in defined-benefit schemes in the UK will receive meaningful compensation, even if their company goes bust and leaves the pension scheme underfunded.

This means people can put their money into those schemes with confidence, knowing that if their firm collapses they will not be left high and dry.

Recently, there have been allegations that the PPF itself might go bust. I can confidently state this will not happen.

When a scheme comes into the PPF, the fund will take control of its assets. Even if that scheme has an alarming level of underfunding, the assets of that scheme will still provide for payment of benefits for years into the future.

Obviously, there would be a deficit between assets and liabilities, but this is where the levy comes in. Paid by companies offering defined-benefit schemes, the levy will be increased to a fixed maximum, if underfunding exceeds expectations.

Of course, the PPF has come too late for workers whose firms have already gone under, which is why the Act also introduces measures to establish the £400 million financial assistance scheme (FAS), to help eligible people who have been affected between January 1997 and April 2005.

I believe the PPF will boost confidence and security in pensions saving, supported by a powerful new Pensions Regulator, and over time, come to be regarded as one of the major social policy innovations of this or any government."

Tackling the Crisis

By Nigel Waterson MP, Shadow Pensions Minister

"As the pensions crisis deepens, the attitude of this government could be characterised as 'Waiting for Turner'. Ministers say that nothing major can happen until the final report of the Turner Commission is received - probably next autumn - and after the date of the next general election.

We Conservatives believe we cannot wait, and if necessary, the final Turner report should be brought forward - so it can inform debate on what is going to be a hot issue in the election campaign.

2005 will see the new Pension Protection Fund [PPF] opening its doors for business. And in the spring we should have details of how the £400 million financial assistance scheme [FAS] is supposed to work. Yet the recent sad news from Turner and Newall does not give great encouragement. Some industry experts have predicted that claims on this scheme alone could swamp the FAS, as well as the PPF in its first year.

And many will be dismayed by the flat-rate levy for the PPF in its early stages - meaning good schemes subsidising the bad.

We will also see a new regulator with increased powers - something we have broadly supported.

There is now a broad consensus that we need to reduce means-testing because it acts as a disincentive to pension saving. The next Conservative government will restore the link between the state pension and average earnings; taking one million pensioners off means-testing in the first four years alone. And we will introduce greater flexibility for women workers, as well as less regulation for company pensions. Our Lifetime Savings Account will encourage saving by those still in work, with the attraction of matching government funding pound for pound - "Buy One, Get One Free" - and the freedom to access savings before retirement. All together, it adds up to a realistic package to address a crisis that now cannot wait."

Challenges for the Pension Protection Fund during the year ahead

By Lawrence Churchill, chair, Pension Protection Fund

"With the Pensions Act 2004 receiving Royal Assent on 18 November last year, the foundations were laid for the creation of the Pension Protection Fund. This will, for the first time, provide a level of security for pension scheme members of UK defined-benefit and hybrid occupational pension schemes, and reassurance that meaningful levels of compensation will be paid even if their employer goes bust.

Without doubt one of my key challenges is to get the organisation operational in four months. Logistically this is extremely challenging, as we aim to have services available in time for when they are needed. However, I have an excellent team working hard to ensure that we meet our target opening date of 6 April.

The appointment of five non-executive directors to the board last November brings a wide range of skills and a high level of experience and expertise that will play a vital role in addressing the key policy issues facing the Pension Protection Fund.

One such policy issue we face is the risk-based levy, where the challenge for myself and the board is to make sure that we get the formula right. I believe that through continued engagement with stakeholders, and our commitment to open and transparent consultation in the spring, we will be able to build consensus around a formula that is both appropriate and proportionate.

The Board will also be developing and publishing its statement of investment principles. Our investment strategy will underpin the prudent management of the fund's assets and ultimately protect the interests of both levy-payers and beneficiaries alike.

Clearly, 2005 is going to be a challenging year but one in which, working with industry, we can deliver real security in retirement for millions of UK pensioners."

Greater compulsion

By Brendan Barber, general secretary, TUC

"The biggest item on the pensions agenda for 2005 will no doubt be the Pensions Commission recommendations to government. The second report of the Pension Commission will lay down proposals for reform to the UK pensions system.

Obviously one of the key issues for the Commission to consider is whether greater compulsion should be introduced. The TUC believes that in order to ensure both the coverage and adequacy of funded pension arrangements, greater compulsion is necessary and we will be making this case to the Commission. Unions feel that this is a once-in-a-generation opportunity to shape a sustainable pensions system.

We will also await the introduction of the Pensions Act with interest. We have welcomed many of the elements that are part of the Act, for example, the Pension Protection Fund (PPF). While not perfect, unions feel that the PPF represents a significant move to provide greater security for beneficiaries, a fact that has often become lost in the debate within the pensions industry. And we feel similarly about the financial assistance scheme (FAS) which has been set up to deal with past cases of failed pensions schemes.

Among a range of other changes in the Act, an interesting element for unions will be dealing with the requirement for trustee knowledge and understanding, and the associated boost of member representation to 50% of trustee boards. The TUC Member Trustee Network will be playing an active role here.

Finally, unions will also continue to defend good quality occupational pensions - be they in the public or private sector. We believe there should be more focus on improving schemes in the private sector, and less on attacking those in the public sector."

Planning for communication

By Sally Ling, GR Communications, and chair, National Association of Pension Funds Training Standards Initiative Communications Sub-Committee

"It's hard to know where to start when looking at communications issues for 2005. While many of the key legislative changes do not come into effect until April 2006, some members will need to make important decisions well before that. For example, should a member delay early retirement in order to take a higher cash sum or bring it forward to avoid the lifetime allowance? Whatever the answer, they can only make this decision if they know about the changes and understand the implications.

One big issue for early this year is to manage members' expectations of the Pension Protection Fund. This is a good opportunity for trustees to sell the merits of their own scheme. It will allow them to demonstrate that, even if their scheme is no longer in surplus, its condition is far from critical. In turn, this should help members appreciate the benefits they are offered and reassure pensioners on security issues.

Many of the impending changes will have different implications for different groups of members and this is an important consideration when planning communications. For example, there is little to be gained from getting the under-30s worked up about the increase in early retirement age.

Trustees should also be thinking about combined benefit statements, if they have not already done so. These reinforce the value of scheme membership and help members understand how much they will have to live on in retirement. In addition, a high rate of voluntary provision of combined statements now, should help avoid future legislation.

There is no doubt it is going to be a busy year, made more challenging by the fact that so much of the detail is yet to be decided. To succeed from a communications point of view, trustees need to secure an adequate communications budget, plan carefully and target their messages."

Pivotal year

By Wendy M Beaver, chair, Pensions Board, Actuarial Profession, and European partner, Mercer Human Resource Consulting

"If 2004 was a year of broad themes and overarching vision for the pension industry, 2005 is expected to be one of detail and implementation. Although the Pensions Act 2004 was signed into law in November, it contained only the broad framework for the new pensions world. Much of the detail will be specified in Regulations and Codes of Practice, and this is expected to be released over the coming months. So what are the key issues remaining and what should be in place or more clearly defined by this time next year?

While the Pension Protection Fund [PPF] becomes formally operational in April 2005, the risk-based levy is not expected to be introduced until the PPF's second year of operation. Information about the approach the PPF Board will adopt toward the levy and other matters vital to its successful operation - such as the fund's investment policy - is expected to emerge during 2005.

As the Codes of Practice are released for consultation throughout 2005, the approach the new Pensions Regulator plans to take should become clearer. How interventionist it is likely to be, and whether it will be willing to tackle the tough outstanding issues, such as the definition of 'technical provisions', will set the tone for pensions regulation and policy for years to come.

And for actuaries, the disappearance of the MFR [minimum funding requirement] as a major plank in the pensions landscape, and the introduction of scheme-specific funding arrangements with the communication of key information to members about the funding of their scheme, will introduce new challenges for the profession.

Regardless of the specifics, 2005 is likely to be a definitive year for the future of defined-benefit pension schemes in the UK and a pivotal one for the pensions industry."