Pensions agenda 2003
The recent Green Paper has ensured that this year will be a busy one. We asked six leading figures what they see on the pensions agenda for the coming year.
Each January, Occupational Pensions asks six leading figures in the pensions industry to outline the major issues they foresee being faced in the year ahead. Taken together, these opinion pieces form a pensions agenda for 2003. Below, we reproduce their views, unedited except for length.
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The main issues on the pensions agenda for 2003, as identified by six leading figures whom we invited to contribute to this feature, are;
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A YEAR OF FLEXIBILITY, CHOICEAND UNDERSTANDING
By Ian McCartney MP, Minister of State for Pensions
"I think that over the next 12 months, pensions will complete its transformation from being a "specialist" subject to being one that is discussed and understood by the man in the street. We're already seeing this, with more and more pension stories being covered by the mainstream press and the proposals contained in the Green Paper to radically simplify the system will accelerate the process.
As Ron Sandler's recommendations are implemented, financial products and sales processes will become easier to understand. The expansion of pension forecasts, spelling out what income an individual can expect in retirement, will also lead to a much better-informed and clued-up public.
2003 will also be the year when new life is breathed into the partnership between government, individuals, businesses, trade unions and the financial industry. Again, simplification is a key part of this. Many of the measures in the Green Paper will significantly reduce the administrative burden on businesses, saving them £150-£200 million a year.
Our proposals to radically simplify the tax treatment of pensions, for example, should significantly reduce the cost to business of providing and administering a pension scheme, and subsequently encourage more firms to do so.
On the other side of the equation, our proposals to create a new, proactive pensions regulator to protect the benefits of scheme members should also encourage more employees to join occupational schemes. We will also be looking at how we can help employers to provide their staff with better information and guidance.
I predict it will be a year of greater flexibility, greater choice and greater understanding of the challenges facing us in regard to tackling pensioner poverty, keeping our pensions system affordable and bridging the gap between expectation and the reality of retirement."
TACKLING THE CONFIDENCE CRISIS
By Tom Ross, president of the Faculty of Actuaries and principal at Aon
"No wonder there has been a general loss of confidence in pension provision on the part of individuals and a loss of commitment to proper pension provision on the part of many employers.
Everyone I talk to agrees that the state system provides inadequate pension rights, is riddled with savings disincentives because of the extent of means-testing and is unstable. Yet the government appears to be in denial - the Green Paper says nothing that could be regarded as radical about state pensions.
The loss of commitment to good occupational provision - by which I unashamedly mean defined-benefit though not necessarily final-salary - is equally disturbing. It reflects a view that human resources, including pensions, are a cost not an investment in long-term competitive advantage and corporate prosperity.
Notwithstanding its good intentions, the MFR [minimum funding requirement] has encouraged a misapprehension on the part of employers, trustees, members and, dare I say it, some professionals, that a standard which is statutory is therefore an adequate standard. The MFR is not an adequate standard to meet a pensions promise. If the promise can be avoided too easily, employers as well as employees won't value it. The Green Paper at least recognises this, although it is very tentative in its proposals.
So I have three big pensions wishes for 2003. First, the government to accept the need for a fundamental review of state pensions, and to proceed speedily with that review. Second, to have clarification and strengthening of the pensions promise, with attendant proper funding standards. I am not, however, advocating a pensions guarantee, and all parties need to understand the risks. With clear affirmation of their responsibilities and independent actuarial advice, trustees are perfectly capable of delivering on this with minimal statutory intervention. And third, to scrap the MFR - now, not in 2005.
Achieving these would give me hope that the confidence gap would begin to close."
OPRA TAKES RISK-BASED APPROACH
By Harriet Maunsell, chair, Occupational Pensions Regulatory Authority
"Last year provided us with opportunities to assess our performance since being established in 1997. We welcomed the Sandler, pensions simplification and National Audit Office reviews as well as a quinquennial review - something all non-departmental public bodies are required to undergo. These reviews have all provided valuable suggestions to enable us to sharpen our regulatory focus.
It is clear the regulator's role needs to evolve from the framework the Pensions Act 1995 created. In particular, OPRA's own experience suggests future regulation of occupational pensions needs to focus on the real risks to members. This means being able to act flexibly, rather than prescriptively. This requires a completely different approach. OPRA is enthusiastic about the opportunity to change into the new regulator.
OPRA and its reviewers have concurred that the ideal pensions regulator should have statutory objectives to ensure that:
There is certainly an important ongoing role for a pensions regulator, and OPRA has provided a strong foundation on which to build.
But, as we are all aware, the shape of pensions provision in the UK is changing and OPRA is only one part of a much bigger picture. Broader issues that have challenged the sector in recent years, such as scheme funding and the problems faced by scheme members in the event of employer liquidation are likely to remain outside OPRA's remit - whilst matters relating to good governance and the safe running of occupational schemes will remain central to OPRA's role.
Protection against certain risks will require new legislation, and the government's Green Paper has paved the way for future regulatory change. Overall, the coming months will be busy for OPRA as we move towards a risk-based approach to pension regulation combined with more proactive powers."
PENSIONS AND SECURITY FOR ALL
By Roger Lyons, general secretary, Amicus
"The government has up to now been focused on underpinning the retirement incomes of the poorest pensioners at around 20% of average earnings. It needed to raise its sights and produce a framework allowing all of the workforce to look forward to a pension income in excess of 50% of pre-retirement earnings after a full working life.
This will not be achieved by Green Paper policies based on incentives and by simplifying pension schemes, even though these are necessary. Half of all employees don't get any voluntary contribution to their pension from their employer, and most employees have debts rather than savings. There must be greater compulsion both on employers and employees, with help for the lowest paid through tax credits. We really don't need the delay associated with the independent commission to expose failure of a voluntary system.
Companies can break valuable pension promises, which employees rely on, without any legal restraint or even having to account for their actions. Employers who wish to vary their pension promise should be required first to give advance notice and to engage in consultation with their employees with a view to reaching agreement. Stopping a pension scheme can ruin people's lives - its long-term effects can be much worse than being sacked. Early legislation on consultation is vital.
The government must do something to help those employers who, through DB [defined-benefit] schemes, are prepared to bear the risks implicit in pension funding. Creating a framework where these pensions can be funded on a more stable, long-term basis by tackling the risk of discontinuance in the event of employer insolvency would be a key measure. A central discontinuance fund backed up by a long-term funding standard, with prescribed long-term assumptions, subject to limited scheme-specific variations, holds the key to this."
MORE AND MORE LEGAL ACTIONS
By David Pollard, chair, Association of Pension Lawyers and partner, Freshfields Bruckhaus Deringer
"Retirement provision is of vital importance. So we should not be surprised that it has resulted in both a lot of legislation and an increasing amount of litigation.
Although lawyers are (strangely) not universally loved, society seems hooked on a legalistic approach: new legislation, new rights, new duties, new dispute mechanics. Individuals are more and more assertive of their individual rights through the courts (or the Pensions Ombudsman or employment tribunals).
Despite the best attempts of the government's Green Paper, the Pickering review and the Revenue simplification report, this will continue. A random sample of likely issues in 2003 and beyond:
So it is lucky that pension lawyers are all so knowledgeable, friendly and good value."
NAPF - LOOKING AHEAD TO 2003
By Peter Thompson, chair, National Association of Pension Funds and worldwide partner, Mercer Human Resource Consulting
"The NAPF is relieved the long-awaited Green Paper includes proposals to simplify the horrendously complex tax and regulatory regimes for workplace pension provision. The government has clearly listened to research carried out by many in the pensions community, including the NAPF, and we welcome this approach.
We are disappointed, though not surprised, that the paper has fought shy of simplifying the state pension system. The complex layers of state retirement provision include the basic state pension, minimum income guarantee, pension credit and state second pension. These make it very difficult for many people, especially the less well off, to decide if and how to save for themselves. It is this complexity which undermines consumer confidence in pensions. The government could have taken this opportunity to simplify state provision, allowing consumers to make their own top-up arrangements, either through their workplace, or with a private pension provider.
The Green Paper is, however, a positive contribution, picking up on much of what Alan Pickering and Ron Sandler proposed five months ago. The NAPF welcomes government proposals to:
Having listened, the onus is now on the government to act. The outstanding question mark hangs over the timing of these changes. The tax proposals involve a four-month consultation process - so no change for at least another 16 months. For many pension schemes and their members, this could be like getting your Christmas presents on Boxing Day."
