Pensions agenda 2004
Two bills dealing with pensions, one on tax and one on simplicity, security and choice, will dominate the coming year. Here, six leading figures set out a pensions agenda.
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Summary of key points The main issues on the pensions agenda for 2004, as identified by six leading figures whom we invited to contribute to this annual feature, are: a Pensions Bill setting out details of numerous changes, including the Pension Protection Fund, scheme-specific funding, the new Regulator and the full buy-out of pension rights when schemes wind up; a Finance Bill delivering tax simplification; government help to retain final-salary schemes (it is hoped); adapting to new anti-discrimination rules; political consensus (it is hoped);
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For the 12th consecutive year Occupational Pensions asked leading pension figures to outline their pensions agenda. The responses are set out below. Between them they raise the main issues that are likely to be dictating the pensions workload in 2004.
A year of palpable change
By Malcolm Wicks MP, Minister of State for Pensions
"New Year messages often seem to start, 'this will be a year of great change' - but for 2004 I could hardly say anything else.
The coming year will be seminal for pensions, as the government takes forward proposals to rebuild confidence in pensions and help people plan for their retirement.
The Pensions Bill will put into place the Pension Protection Fund and a new Pensions Regulator to ensure that savings invested in company schemes are secured.
Reforms amending the priority order will kick into effect, along with measures to compel solvent employers winding up their pension scheme to buy out members' benefits.
The bottom line is that occupational scheme members will be able to count on receiving a meaningful income in retirement, whatever their company's financial situation.
We must also reconcile the challenge of an ageing population, where the average retirements could last around 20 years, with most peoples' desire to retire on a pension worth two-thirds of their final salary. People will need to consider saving more, working longer or a combination of the two.
If we are serious about asking people to save more, we need to empower them to make choices about their needs in retirement and about the savings options available to them.
This year we will be bringing forward our Informed Choice agenda so that people will have the information they need to plan ahead. Regular combined pensions forecasts will give people a pensions 'healthcheck' - in time to make a real difference to their income in retirement.
2004 will - I hope - be one of palpable changes for pensions. Tackling pensioner poverty, making Britain a more pensions-literate place, and putting the 'security' back into social security in old age are all ambitious goals. We must work together to achieve them."
No heavy-handed implementation, please
By Roger Cobley, president, the Pensions Management Institute
"Pensions has spent much of 2003 in the headlines, often for the wrong reasons, and this is likely to continue throughout 2004. There will be much activity as schemes come to terms with the new taxation regime, intended to be effective from April 2005, and with whatever new legislation the government introduces following the proposals and consultation which occupied us in 2003.
A Pensions Act 2004 is likely to give rise to considerable argument and debate over the structure and funding of the Pension Protection Fund, the details of the scheme-specific funding standard to replace MFR [the minimum funding requirement] and the role of the new Regulator. Schemes will need to adjust to the new anti-discrimination Regulations in respect of sexual orientation and religious belief, and those on disability.
Although the state pension arrangements have come in for a great deal of criticism from all sides, it seems that this government has decided that there is no need for change, so the present system of low basic state pension supplemented by mass means-tested benefits will continue.
The way in which the government will implement the terms of the new EU Directive on occupational pensions and the powers granted to the new Regulator have the potential to add enormously to the regulatory burden already imposed on schemes, leading to major additional costs, particularly for defined-benefit schemes, with the result that still more employers may seek to distance themselves from pension arrangements. It is vital that the government is made aware of all the risks to pension schemes that heavy-handed implementation could entail to avoid this being entirely counter-productive to the need to encourage and enhance retirement provision through occupational pension schemes.
2004 promises to be another high-profile year for pensions, with much extra work for all highly specialised professionals involved."
All change for pensions
By Belinda Benney, partner, Field Fisher Waterhouse, solicitors, and member of the board of the Occupational Pensions Regulatory Authority
"Pensions lawyers were not sure what to expect under the tree last Christmas. One year on, some of the pensions toys have passed their sell-by dates. Those stakeholder pension 'empty boxes' were disappointing. Then there was the magic set with the special trick which made those pension scheme assets vanish for the third year running. And we got all excited about things promised for 'spring', 'summer' and 'autumn' which never materialised (like the Pensions Bill and the Penrose report).
2004 looks like being a year of change and preparation, gearing up to April 2005, when we may have a Pensions Act and a new simplified tax code for pensions. Significant structural changes to pension scheme design and funding have been signposted. In particular, final-salary schemes anxiously await details of the scheme-specific funding requirement, the levy for the Pension Protection Fund and when and how full buyout cost will apply on scheme termination. Apart from constant change on the home front, there will be other legal issues with a European dimension to watch:
TUPE - the Beckmann and Martin decisions will create problems for many TUPE transfers. Will the government's proposals to bring occupational pensions within the TUPE transfer net be implemented?
IORP - the new EU Directive on institutions for occupational retirement provision has to be enacted in UK law by September 2005. This will influence the design of the Pensions Bill and the new Pensions Regulator, and enforcement of the Myners investment principles.
Discrimination - trustees will need to review their rules and practice on dependants' pensions. Schemes have a new implied non-discrimination rule. While trustees can discriminate on grounds of marital status, schemes will have to equalise future survivor benefits for unmarried opposite-sex 'common law' partners and same-sex partners. Civil partnership registration for same-sex partners may also come into force."
Getting on with it
By Alison O'Connell, director, Pensions Policy Institute
"A week is a long time in politics. A year flies by in pensions. 2003 promised much, as we got to grips with a Green Paper and radical tax reform proposals. But the pace slowed. Massive detailed work is needed to develop the Pension Protection Fund (PPF). Tax reform became stuck in unseemly arguments that could have been avoided.
So, even being realistic about what can be achieved in only a year, two of my pension wishes for 2004 would be to 'get on with it'. First, many of the Green Paper proposals can start very soon. Even if the PPF takes longer, issues like wind-up priority order and the facility to work for the same employer while receiving an occupational pension should start this year.
Second, we should know firm plans on tax reform by the time of the Budget. Financial planning is difficult enough without further uncertainty about what might change in future.
The third wish builds on the increasing consensus for comprehensive reform of state pensions, currently widely criticised as complex and inadequate. The disincentive to save caused by the increasing scope of means-testing prevents private pensions filling the gap left by declining state provision. This will come into sharper focus as we all live longer.
In 2003, realisation of the need to face these issues dawned. 2004 may not see great strides ahead, but debate will continue. What would really help pensions is a sign that political parties were prepared to work together to find a solution for the long term - beyond the next parliament and the one after that. We need a mechanism to make political consensus happen. Wouldn't it be good for pensions if the leaders of the main parties announced that their pensions spokesmen were getting around a table to start discussing what long-term pension principles they might all sign up to?"
Restoring pension confidence and responsibility
By Michael Leahy, general secretary, ISTC - the community union
"ISTC members in companies with occupational pension schemes look forward to the passing of the government's Pensions Bill, which will make their pension more secure, particularly the introduction of the Pension Protection Fund.
Occupational pension schemes have been one of the great success stories in providing security in retirement for working people since World War II. Yet, under the Tories it became received wisdom that only immediate shareholder value was a concern for companies. This led to the bizarre notion that, as Tom Ross, president of the Faculty of Actuaries, noted in Occupational Pensions last January: 'pensions are [seen as] a cost not an investment in long-term competitive advantage and corporate prosperity.'
Successful companies, like Unilever and Scottish & Newcastle, have resisted pressure from City analysts to close their pension schemes. They need to deliver consistently good performance and innovation, and know that the retention of good, well-motivated staff is crucial to this. The government can help reverse short-term pressure to close company pension schemes. If it does, I am convinced that it will help British industry to deliver long-term success for all stakeholders.
However, whilst the ISTC welcomes the Pensions Bill, it is clear that there is one glaring omission which will prevent the restoration of confidence in occupational pensions: a lack of compensation for those who have lost the pensions that they were told were safe, and were counting on for security in retirement. This includes ISTC members of the ASW pension schemes.
The ISTC and Amicus are taking legal action against the government on behalf of our members at ASW. We hope that we do not have to go to court, but we are fully prepared to do so. Instead, we hope that the government sees sense. If confidence in occupational pensions is to be restored, then the ASW scheme members need to be compensated."
Raising our game
By Ronald S Bowie, chair, Pensions Board of the Institute and Faculty of Actuaries, and senior partner, consultants and actuaries Hymans Robertson
"On 11 June 2003 the government announced that solvent employers were expected to stand behind their pensions promise. This announcement is potentially a defining moment for defined-benefit pension plans in the UK.
Previously, a solvent employer could wind up its scheme leaving active and deferred members with a transfer value based on the minimum funding requirement (MFR). Because of the assumptions underlying the MFR this transfer value would be unlikely to deliver the 'promised' benefits.
Now (or at least from 2005), members will get what they were promised. The exceptions to this will be cases of insolvency or as a result of negotiated settlement. This has wide-ranging implications:
Almost all the risks now truly are with the employer. These same employers are still coming to terms with the balance sheet volatility produced by a combustible mixture of market-based FRS17 and equity investment. Trustees would be wise to include the sponsoring employer in any discussion about the most suitable investment policy and funding plan in these new circumstances.
Scheme-specific funding is intended to encourage a move away from the disadvantages of a 'one size fits all' MFR. But:
- the regulator will be policing scheme funding. Will actuaries and trustees try to second guess the regulator when devising their scheme-specific funding plans?
And:
- will the level of coverage provided by the Pension Protection Fund (PPF) and/or the funding level on which the risk-based element of the PPF is levied become the 'new MFR'?
Assuming the sponsoring employer remains solvent, deferred members are highly likely to receive their full deferred benefits. Should actuaries now change the calculation of transfer values to reflect this newly found benefit security?
The rules of the game have changed. Employers, trustees and their actuaries need to rise to the challenge."
