Respondents regard DWP proposals as a missed opportunity
While the Government's tax proposals are generally welcomed, the overall response to the pensions Green Paper is one of resigned disappointment. Respondents do not feel the package of measures will encourage more employers to sponsor schemes.
|
|
The verdict on the Government's Green Paper on pensions is that it is an opportunity missed. Though responses from the major representative bodies take issue with some of the detail in the associated tax proposals, they are generally favourable and in summary conclude that the ideas on tax simplification are a good attempt at a difficult issue.
By and large respondents believe that the Green Paper proposals will do little to encourage more people to save for their retirement, or more employers to offer schemes. Most regard the security of benefits as an unsolved, even unsolvable, problem and no one suggests that the trend from defined-benefit (DB) to defined-contribution will be slowed, let alone reversed. There is, however, acknowledgement that many of the individual proposals are in themselves beneficial.
This feature examines responses to the main proposals in the Green Paper and the tax simplification report, setting out a summary of the responses on six key issues by eight of the principal policy shapers in the main table.
State pensions
Probably the most prevalent criticism made in the responses is that the Department for Work and Pensions (DWP) does nothing in the Green Paper to bolster the state pension or address its complexity. The National Association of Pension Funds (NAPF) says "the government has missed a golden opportunity by excluding from the scope of this consultation a review of the complex interrelationship between state pension arrangements, the state pension age, means-tested benefits and private retirement provision".
While the NAPF calls for an easily understood state scheme, state benefit needs to be "meaningful", according to the Faculty and Institute of Actuaries (referred to throughout as the actuarial profession), and the state system should be "robust", according to the Association of British Insurers (ABI). The TUC wants an "improved" state pension. The Pensions Policy Institute (PPI) says that private pension provision will still be undermined by the complexity of state provision.
This apparent consensus on state pensions among some unlikely bedfellows does not survive a detailed assessment of their individual proposals for reform.
Contracting-out
Many respondents do not deal with the desirability of contracting out continuing, but just with the detailed changes proposed. And those that do comment do not always agree: for example, the ABI wants contracting out retained, whereas the NAPF and the actuarial profession want it scrapped (see part 2 of the table). The Society of Pension Consultants (SPC) does not like contracting out, but is fearful of the cost of restructuring benefits if it is removed.
If contracting out is retained (as seems very likely), the NAPF supports the changes to the reference scheme test outlined in the Green Paper. However, most respondents do not favour tinkering with the test. The Association of Pension Lawyers (APL) and the SPC make similar points about practical difficulties associated with changes. They say that reducing the accrual rate for the test but widening the earnings on which it is based would impact on different schemes differently, with the result that some schemes that meet the current test might not meet the new one. The proposed change would, as the APL says, impact particularly on integrated schemes. The actuarial profession goes further and argues, that the new test would never be weaker than the old test.
One change to contracting out that is widely supported is the abolition or simplification of guaranteed minimum pensions (GMPs). As with many of the changes, however, consensus is more apparent on the desirability of the objective than it is on the means of achieving it. The APL would like to see GMPs operated as it says was originally intended, as an underpin, not as an identifiable element of each member's pension with its own special rules.
There is some support for adopting the Pickering report's idea that the provision of spouses' pensions should not be a requirement for contracted-out schemes. However, no respondents feel that dropping this requirement would have much impact on the willingness of employers to operate occupational schemes. A number comment that most employers would want their schemes to continue to offer such pensions.
Contracting-out rebates are generally considered to be poor value.
Tax simplification
It is fair to say that in spite of specific criticisms about some of its suggestions, the general thrust of responses to the tax simplification paper has been more positive than comments on the Green Paper. The genuine radicalism of the proposals took many commentators by surprise.
In particular, respondents have welcomed the removal of service and salary tests for future benefits. In addition, the fact that many scheme members will be entitled to higher tax-free cash at retirement is a popular proposal, as is the introduction of full concurrency and the removal of the 15% limit on contributions.
The TUC reflects the view of many organisations when it says that the current tax regime acts as a barrier to saving and creates confusion. However, it also voices one of the main criticisms of the lifetime limit, which is that linking it to rises in the retail prices index is inappropriate. There is general agreement that it would be much better if the limit was linked to increases in national average earnings. For the actuarial profession, this is the key issue arising from the proposed new regime.
The lifetime limit
Concern has also been expressed about the initial starting point of the lifetime limit - £1.4 million. The Revenue says that it represents the funds required to buy the maximum pension that can be provided under the present earnings cap regime. However, actuaries Barnett Waddingham, in common with a number of other organisations, believes that in current market conditions, the sum required is closer to £1.8 million. Several bodies make the point that if the lifetime limit is set too low, the problems of the present system are replicated, whereby key decision-makers at major companies are effectively excluded from the main pension scheme. However, only the NAPF argues that this alienation of senior executives is so unwelcome that there should be no lifetime limit.
The 33% recovery charge on excess funds has also come in for a lot of criticism for being penal. When combined with higher rate tax, its effect would be to tax benefits in excess of the lifetime limit at 60%. A number of responses contain a plea for the tax regime on excess benefits to be neutral so that, yet again, senior executives are not excluded from the ambit of schemes. Clarification is also sought about whether scheme trustees or members would be responsible for paying the tax charge.
Other tax proposals
A number of responses to the Revenue's paper query the need for the annual restriction on increases to benefits as well as the lifetime limit. There is concern that its imposition will affect redundancy and ill-health early retirement payments. Even if the annual limit is retained, some organisations suggest that it should not apply in the year of retirement. The TUC points out that it is common for companies to pay redundancy compensation through pension schemes, and this proposal could restrict their ability to do this in the future.
Pleas are also made for careful consideration to be given to the factors that would be used to convert defined benefits into a notional fund for the purposes of testing them against both the annual and lifetime limits. In addition, it is suggested that more generous factors should be used to assess pre-A-day benefits against the lifetime limit than those used at retirement.
Several comments revolve around a suitable date for A-day. At the moment the government is suggesting that the changes could be introduced by April 2004, but April 2005 seems to be preferred by respondents. There are also questions raised about how unfunded arrangements fit into the new regime. It is hoped these will be dealt with when the Inland Revenue issues a more detailed consultation paper later in the year.
Flexible and later retirement
The tax simplification paper contains two main proposals regarding retirement. Firstly, it recommends that the concept of flexible retirement, whereby employees can start to draw some of their pension while still working for an employer under the scheme, should be introduced. Secondly, it reiterates the idea, first proposed some years ago, that the earliest age at which an early retirement pension can be taken should be raised from 50 to 55 by 2010.
The first suggestion seems to have universal approval. Aon Consulting even suggests that flexible retirement could be introduced immediately. However, the second proposal has only been given a qualified welcome. A number of organisations point out that, while the change is desirable, a longer lead time may be required to allow people to retire early who have already ordered their affairs on the basis they will be retiring before age 55.
Both the TUC and the Work Foundation are strongly opposed to raising the early retirement age. They believe that its introduction would force many people who are compelled to leave the labour market before reaching the age of 55 onto state benefits.
None of the responses reviewed oppose the recommendation in the Green Paper to bring forward an existing provision to increase the rate of enhancement of deferred state pensions from 2010 to 2006. However, there is some scepticism as to whether the new rate will be high enough to encourage people to defer their state pensions. Several organisations, including the PPI and the NAPF, suggest it would be preferable to raise state retirement age to 70.
Annuity proposals
The tax simplification paper puts forward several suggestions for the reform of annuities. Although there is support for the idea of making the purchase of an annuity simpler and easier to understand, most respondents do not believe that the current proposals will have this effect. The ABI believes that the proposed range of annuities would only confuse people and that without access to good independent advice, retirees will not be able to make proper comparisons.
In common with other organisations, OPAS, the Pensions Advisory Service, does not see why the government is insisting that annuities must be purchased by age 75. It is also of the opinion that it is not good for pensioners to be forced into the hands of insurance companies. Several organisations also comment that the proposals will make administration complex.
Security of benefits
The response by the actuarial profession on the security of benefits is stark. It says that "many schemes today cannot guarantee the benefits that members expect to receive". It regards this as the "reality" and believes the government should require trustees to inform members of this. The implication is that employees can then make an informed choice on whether or not to join schemes.
Few respondents deal with the minimum funding requirement (MFR) in any detail. Several point out that the Green Paper contains little new and say that, following its earlier consultation on the issue, the government should now act promptly. There is general support for replacing the MFR with a scheme-specific standard, including from the TUC, which is concerned that the new standard should not be so flexible as to accommodate the financial circumstances of individual employers or give actuaries too much discretion.
There is much support for a new regulator to replace the Occupational Pensions Regulatory Authority (OPRA), but the responses do not address how new is "new". As we have reported before, the new regulator will take on OPRA's staff and, we assume, be located in the same building - the NAPF comments that staff will need a "different skills base".
There is general acceptance, if not enthusiasm, for the removal of the employer opt-out from appointing member-nominated trustees (MNTs), though the PMI is one that still opposes this development. The TUC is pressing for the proportion of MNTs to be one-half rather than the one-third proposed by the government, and it is also concerned that so much attention is being given to the outcome and believes that the process by which MNTs are appointed is important too.
Winding up with solvent employer
Drawing on its own experience, OPAS takes a very firm line on this issue, saying that companies with a final-salary scheme have "effectively formed a contract with the scheme members to provide the pension accrued to the date the scheme winds up". It wants to see the company's obligation calculated by reference to the cost of purchasing a deferred annuity. It says that a transfer value calculated by reference to the MFR is not "an adequate representation of the liability that the company has taken on through the scheme". Indeed, it wants to see personal penalties (presumably for company directors) where companies avoid their liability.
The NAPF also believes that solvent employers that wind up schemes should be required to honour their pension promise. However, like a number of responses, its view of what honouring the pension promise means is different from that of OPAS. The NAPF considers that employers should be able to replace a DB promise with a money-purchase equivalent, provided an actuary certifies the replacement benefit as equivalent to the benefit lost. In addition, it believes that employers should be able to fund benefits over the remaining working lifetime of the members.
Winding up with employer insolvent
There is only limited support for the establishment of a central discontinuance fund, and the actuarial profession's response briefly discusses some of the difficulties with the concept. The TUC and OPAS are two respondents that do favour the concept. The actuarial profession appears to be more sympathetic to the use of insurance, but this is dealt what will probably be a body blow by the ABI, which says that insurers would not offer it.
There is support for a compensation scheme for members of underfunded schemes that wind up when the employer is insolvent. The NAPF supports the idea of a post-event levy, but envisages that it would not guarantee full benefits to members.
There is also broad support for changing the priority order for the payment of benefits when a scheme is underfunded on winding up. The SPC, for example, describes the current arrangements as producing "some appalling unfair results". Most agree that pensioners should no longer have priority over active members, but there are divergent views on a replacement for the current rules.
The government says it plans to retain an amended statutory priority order, but most respondents favour apportioning benefits to members pro rata to the value of benefits accrued. The APL's response quotes a claim that, in the ASW case (OP, December 2002), the assets would have been sufficient to give all members around 95% of their benefit value, whereas under the existing statutory rules non-pensioners will get only 40%. There is no support for treating those within 10 years of retirement differently from younger workers. The NAPF suggests that the distribution of assets should be determined by the trustees on the basis of legal and actuarial advice, which would be a phenomenal responsibility.
Both the actuarial profession and the SPC support the proposal that pension schemes be given a higher priority as creditors of an insolvent sponsoring employer. The SPC argues that it is wrong for businesses to take on additional unsecured debts when their pension scheme has a substantial deficiency. In so doing, it says, they put at risk current and former employees' retirement incomes earned by the service they have given. However, the Pensions Management Institute (PMI) opposes the idea, arguing this would potentially move the problem on to the members of the pension schemes of the unsecured creditors, but this assumes that those companies would also become insolvent.
Compulsory employer contributions
The TUC believes that the case for compulsory employer contributions to occupational schemes is compelling and recommends that the rate should be set at 10%. In its Green Paper submission, it acknowledges that this would be a significant intervention in the labour market, so the contribution should be phased in over a reasonable period. It points to the Australian experience to support its proposition.
However, most of the other responses reviewed support the government's view that there is no clear case for compulsion. The SPC also refers to the Australian experience but to demonstrate that employers reduced their contributions to the compulsory minimum.
Unsurprisingly, the CBI is vehemently against compulsion, claiming it would cost employers £29 million a year. Other respondents comment that a voluntarist approach with incentives to encourage saving is the best approach.
Neither is there great support for the lesser step of allowing schemes to introduce compulsory membership in certain circumstances. Mercer Human Resource Consulting points out that this idea does not sit well with the aim of simplification. The Work Foundation believes that it would be inappropriate given the current weak protection afforded to members' pension rights.
Immediate vesting and compulsory transfers
The majority of respondents accept the government's proposal that there should be immediate vesting of pensions, with the proviso that it must be combined with the compulsory transfer of de minimis amounts. Among supporters of the idea, there is agreement that the process should be as administratively simple as possible.
However, some reservations are expressed about the recommendation. A number of respondents, both for and against the suggestion, believe that if introduced, immediate vesting would lead to the introduction of non-pensionable waiting periods.
Concern is also expressed by a number of organisations that the compulsory transfer of de minimis amounts would have the effect of converting final-salary pensions into defined-contribution benefits, which may not be to members' advantage. This is the main argument put forward by OPAS against the proposal. It also mentions that its experience of receiving complaints from members of schemes that already have immediate vesting suggests there is no great demand for it.
There is general agreement that £10,000 is a good level for the de minimis amount. However, the PMI points out that the system will only work if stakeholder schemes are prepared to accept business with the 1% margin. The SPC comments that experience suggests that the minimum amount for compulsory transfers will be left unchanged, so that its real value would be progressively eroded.
A number of responses mention that transfers are more expensive to administer than refunds. For this reason, the NAPF tentatively suggests introducing a one-year vesting period.
Removing LPI
The Green Paper asked for views on whether the withdrawal of limited price indexation (LPI) to pensions in payment accrued from 1997 would increase the coverage of and contributions to occupational pensions.
The actuarial profession maintains that "the retention of LPI is likely to be a Pyrrhic victory because it will only serve to encourage employers to replace their defined-benefit schemes with stakeholder schemes which have no LPI requirement". The ABI, the NAPF, the PMI and the SPC all also believe that the requirement to apply LPI should be dropped. It is acknowledged by some that, in practice, most schemes would continue to award LPI increases.
Respondents do not support disapplying LPI for pensions above £30,000, on the basis that it would add complication and be of little practical effect. There is also a view among some respondents that it would be unwise to make this change, or any others affecting high earners, for fear that senior executives - who are likely to make many of the crucial decisions on employer pension provision - may become disenchanted.
The removal of LPI is strongly opposed by the TUC.
Amending schemes
The government's proposals on easing s.67 of the Pensions Act 1995, which prevents changes to accrued pension rights, are opposed by numerous respondents.
The actuarial profession, the APL, the NAPF and the PMI would all like to see the law allow accrued rights to be converted to different rights of an equivalent value. The APL suggests this could be achieved using cash equivalent transfer values. A number of respondents maintain that if the approach outlined in the Green Paper is followed - which proposes that only a limited amount by value of accrued benefits could be subject to amendment - the suggested 5% cap should be raised.
OPAS is concerned about the proposal, pointing out that, while the actuarial value of a benefit given up under a scheme amendment may be small, the value to someone who qualifies may be very significant. The union Amicus takes a similar stance, but argues that if amendments are nonetheless permitted they should be preceded by consultation with employee representatives and by notice to members.
Business transfers
Responses on the protection of pensions on a business transfer focus mainly on the form of protection, rather than on whether such protection should be given. The NAPF wants to see successor companies providing pension benefits that meet a test of "broadly equivalent value".
In contrast, the TUC considers that the new company should provide transferred employees with a pension of "equal quality". It is adamant that no employee should be transferred to a group personal pension or a stakeholder scheme, while the PMI, for example, welcomes this facility.
Pension planning
The Green Paper proposes a large number of initiatives to increase awareness of pensions so that people are able to make informed choices. These include a telephone service, a website, extending combined pension forecasts and more provision of information by employers.
OPAS understandably puts in a bid to be the first port of call for answers to basic queries. Other submissions suggest that a new independent pensions education body should be established. This harks back to the days of the Company Pensions Information Centre, which provided a similar service but was funded by insurance companies rather than the government.
Several responses point out that unless state pensions are made easier to understand, improving comprehension of private pensions will not solve the problem. Similarly, while there is almost universal support for combined pension forecasts, a number of organisations comment that their success is dependent on accurate information on state benefits being available promptly.
|
This feature
is based on a detailed consideration of the responses of the eight
representative organisations listed in the tables and on responses from a
range of other bodies. |
