So that was pensions.....March 2003
One regular feature I think you’ll like will be the ‘Pensions and Politics’ section which will cover the goings-on in Westminster every month. This will be written by Annabel Berdy of the Jackson Consultancy in her own inimitable style. The Jackson guys are the political lobbyists who do such sterling work for Scottish Life and Royal London and I always look forward to Annabel’s amusing weekly e-mails that she sends me so I can keep up-to-date with all things political. Her combination of deep insight and dry wit is such good value I’ve asked her to put together a monthly summary I can share with the BeeHive regulars. I’m sure you’ll like it and learn from it too, as I do.
The Inland Revenue Review and Pensions Green Paper
Well, this has obviously been the big story, not just for last month, but for the year so far. Having finally received the long-awaited Green Paper on pensions and, crucially, the results of the concurrent review that was undertaken by the Inland Revenue, just before Christmas, the last few months have seen the industry busy with the business of consultation. The consultation period for the Green Paper itself ended last week on the 28th of March, and the period of consultation on the Inland Revenue stuff is all but over now, finishing on 11th April. The Green Paper contained few surprises, with most of it having been trailed in advance and most commentators have expressed their disappointment that important issues were either glossed-over or left out altogether. One example of this came from Richard Brooks of the think tank IPPR who said; “The new Green Paper looks like tinkering with the current framework, rather than the radical overhaul that many see as imperative.”* I think the jury’s still out on the Green Paper and we all now wait with interest to see what the exact details are going to be. Importantly, we need to be reassured that the way the proposed new tax-regime will interact with the various methods of contracting-out of the state scheme will indeed mean we will have only one pensions regime in future, rather than the current eight or so.
The Inland Revenue review, though, was I think very helpful and should lead to genuine simplification of our pensions system if its proposals are implemented and the DWP stuff is properly integrated with it. As I’m sure you know, it’s not like me to be full of praise for pensions legislators unless I think they deserve it. This time they do. In my opinion the main proposals from the Revenue, if implemented, will result in genuine simplification of the system and could even make pensions sexy again.
In plain English, the main proposal being made by the Inland Revenue guys is that we should have a single tax regime for all pensions, both individual pensions and company pensions and, surprisingly, incorporating defined benefit pensions and defined contribution pensions in the same regime, and all to be effective retrospectively! That’s pretty radical and goes a great deal further than anyone expected (I’d have been happy with a single Defined Contribution regime, as any of you who came to our last series of roadshows will know). The way this single regime is envisaged working in practice is that the Inland Revenue will value all pensions as they come into payment and that a monetary limit will be set on the maximum amount that an approved pension fund can attain. This is to be set at £1.4 million from the proposed implementation date and will be indexed annually thereafter. The indexing is something that caused a good deal of hot air to be expended during March as the end of consultation drew nearer.
The Lifetime Limit and the crucial question of indexation
The common consent seems to be that the idea of a Lifetime Limit approach is alright, but that the limit itself should be indexed in line with increases in the general level of earnings and not prices. The ABI have said this in their response, as have many others including Scottish Life. Now, to be fair to the Revenue, they never did say the limit would increase in line with prices, but then again they didn’t say it would be linked to earnings either, and that’s what seems to have got people leaping up and down a bit. Where it leaves us now, at the end of March, is that the point has been well made against a link to prices and we’re pretty hopeful that linkage to earnings increases or something like it will be accepted by the Revenue. But, as with everything else at the moment, it’s really just a question of keeping our fingers crossed until we actually see it in writing.
The Fat-Cat Thing
The new approach, though, basically means that for most people the existing benefit limits applying to pensions will cease to have any relevance. In this way the legislation is retrospective and most people should be able to put more in to tax-efficient pensions and receive higher tax-free cash sums as well! The past benefit limits and anomalies will simply not count any more. For those people who already have retirement savings worth more than £1.4 million at the date of change, there are some big issues that have driven most of the press headlines for the last month or so. It is obviously not right that we should be seen to be going on all the time about how these new rules will affect quite wealthy people, but it is highly relevant, I think, that so many acres of press coverage have been devoted to the problems being caused for this relatively small group of people. It is true that many of us in the industry have been campaigning for a long time for the simplifications that are proposed here. But I don’t think anybody seriously wanted a simple system that would also alienate most of the pension decision-makers in most UK companies and risk them going off the idea of pensions entirely. Again, I think this point has been well made by many commentators in the last month or so, and hopefully the Revenue will have been listening carefully and reading behind the headlines. It’s not a fat-cat thing. It’s something else entirely.
As far as the important matter of benefits is concerned, everybody, even those in defined-benefit occupational schemes will be able to take up to 25% of their pensions pot as a tax-free cash sum at retirement, even, as I understand it, those who are currently subject to restrictions on their tax-free cash (such as previous transferees who were over age 45 at the time of transfer). This has been generally welcomed. It means that the previous anomalies that littered our pensions landscape would appear to have been swept away. In the same way, the three tax regimes affecting occupational schemes; the pre 1987 regime; the post 1987 - pre 1989 regime; and the post 1989 regime would also be made irrelevant by these proposed changes and that has to be good news for all of us.
SSASs and SIPPs
SSASs and SIPPs had a bit of a worrying time of it earlier in the year, but in the last month or so we’ve seen what looks like a bit of a climbdown on the restrictions many thought would apply to property investments and that’s been generally welcomed. The original proposals, if you remember, were really saying that all pensions should be the same in this single-regime approach. What that translates to is that either all pensions get the same rights as SSASs and SIPPs have, or SSASs and SIPPs would get the same rights as other pensions. It wasn’t too hard to work out what way that was likely to go. Well, it doesn’t look so bad now, at least as far as property holdings go, but it seems unlikely scheme loans will survive. We’ll see, though, as with everything else.
The other big issue deriving from the Inland Revenue review that has had a fair bit of comment this month has been the timing issue. These proposals are set to be implemented on a day dramatically called ‘A-Day’ in the consultation document, and that is targeted to be as soon as 6 April 2004. It’s now looking less and less likely that the Revenue will be able to meet that date and the clever money is now going on 6 April 2005 instead, or even 2006 as an outside bet. Again, we’ll have to wait and see, but there is a growing realisation, I think, that such major changes will need a reasonable amount of time to implement. The ABI have recommended in their response to government that A-Day for both the Inland Revenue and DWP changes should be no earlier than 12 months after all legislation and regulations have been finalised. (That’s the day I have christened as ‘Penny-Dropping Day’ as all avid readers of the BeeLines will know.) The ABI went on to say that in practice this would mean April 2005 at the earliest.
One of the big issues surrounding the Green Paper’s proposals, or lack of them, is that the perennial issue concerning the suitability of pensions has still not been properly addressed. It is now looking like this issue will not just crawl away and die. More and more people are agreeing with the line Scottish Life has taken all along that the suitability of pensions is one of the most important issues facing those of us trying to distribute pensions in the UK these days. Indeed, you will recall we were called to give evidence to the Work and Pensions Select Committee earlier this year on just that point.
Michael Howard, the Shadow Chancellor, said as recently as last week in a speech he gave to the CII that Stakeholder products may be unsuitable for savers. In relation to pensions he said; “In a world where, as we have calculated, a typical couple living in rented accommodation now need to have saved at least £142,000 in addition to the state pension to remain clear of means testing in retirement, a huge swathe of the population might indeed be ill-advised to buy a pension.”** Clearly, the whole idea of means-testing and the knock-on effects on pension distribution is now firmly at the centre of the public debate on pensions the Green Paper and Inland Revenue review has started. I am looking forward to seeing how this all develops during the coming months as the legislation begins to take shape.
OPRA Guidance on Pension Transfers
OPRA, the regulatory body for occupational pension schemes, issued guidance in the last month or so regarding the payment of transfer values from final salary schemes. The rules governing the way that pension transfers are calculated haven’t changed since the Pensions Act 1995 came into effect and allowed Trustees to take account of the funding position of the scheme when paying out pension transfers. But the rules haven’t been perfect and have been shown up as such with the changes we’ve seen in recent years as the value of pension funds has fallen.
This has meant some people have been taking the full cash value of their full entitlement when transferring out, even if their pension scheme’s funding position has deteriorated. This, of course, is bad news for those left in the scheme. An amendment has been going through the legislative mill for some time now (unrelated to the green paper or anything like that) to put matters right. But this will not come in much before the Summer, so OPRA have acted now to help a few employers whose schemes may be losing out. What they have done is to allow some schemes, in tightly defined circumstances and only after certain steps have been taken, to stop quoting transfer values for a while.
What resulted in the press was the usual unhelpful stuff about pension transfers being in crisis and isn’t this another nail in the coffin for pensions etc etc. Obviously people were worried and that generated even more press coverage and so on. But it all died down after a while and was eventually seen by most as what it is, just something that was happening anyway that was actually quite sensible. It was exciting for a while, but was soon superseded by an even more worrying pensions disaster for journalists to worry people with...
Tax-Free Cash Scare from Europe
Yes, you’ve guessed it. As if we didn’t have enough going on last month already with the consultation stuff and the perennial pensions scandals and scares, we heard worrying rumblings from the European Parliament towards the end of February about a threat to our tax-free cash from our pensions. This, just as we’d finally got the Inland Revenue coming off the fence in their consultation paper and saying loud and clear that tax-free cash is a good thing and is central to our pension system. For a while we were all in headless chicken mode when we heard news of the European Parliament’s economic and monetary affairs committee’s vote on some obscure amendments to the Occupational Pensions Directive, or the OPD if you’re pensions-cool. The OPD is a hefty chunk of legislation aimed at paving the way for cross-border pension schemes, but the dodgy amendment was one that said something like pension schemes should only provide annuities, not tax-free cash. Well, that made everyone over here sit up and take notice I can tell you. After a nerve-racking week or so it all died down again. The UK pension lobby managed to tidy up the amendment and our tax-free lump sums are safe again. For now.
BeeLines in March 2003
Be honest, you knew this bit was coming didn’t you? I thought at some point it would be good to mention the many BeeLines we’ve added to the BeeHive last month. Many of them cover in a bit more detail much of what is summarised here and you can, of course, register to receive regular e-mail updates as new stuff is added every week. I’m sure most of you already do this, but if you’re one of the few who don’t, well that’s something you’ll need to sort out between yourself and your own conscience.
If you are a BeeHive regular (and by definition therefore one of my favourite people) you will know that we have just added our responses to the Revenue and DWP consultations to the ‘Political Papers’ area within the site. Plenty of reading there if you’re suffering from insomnia or something, and a handy present you can download and print out to give to that special person in your life if you’re ever stuck for an innovative and unusual birthday or anniversary gift. We’ve all been there. I know my wife was literally speechless when I gave her a rough draft of one of our upcoming Political Papers last Sunday as a Mother’s Day present.
Anyway, talking about our Political Papers leads neatly into Annabel Berdy’s piece on last month in politics with which we’ll end up this issue. Annabel, over to you...
Pensions and Politics
The war in the Gulf continues to dominate politics, with most other issues taking a back seat. Politicians appear wholly preoccupied by developments in the war and there has been a clear fascination with the potential for the War to derail the Government. Most noticeably, for the first time since 1997 there are now realistic scenarios, based on different Gulf War outcomes, that foresee Labour losing the next General Election.
The timing of the Chancellor’s budget statement has also been influenced by the war. In previous years the Chancellor would have moved heaven and earth to ensure that nothing overshadowed his Budget set piece, but this year is different. With the difficult news he will have to deliver - on lower than expected UK growth and consequent concerns over levels of future tax revenue - the distraction of a war may be extremely welcome!
The debate over the Pensions Green Paper and the Inland Revenue Review has intensified this month as the consultation deadlines have approached. The TUC and the CBI have been at loggerheads although both agree that the Green Paper hasn’t been nearly ‘radical’ enough to deal with the current ‘pensions crisis’. The TUC are angling for employer compulsion while the CBI is calling for incentivisation. The CBI believe that employers have been a convenient scapegoat for the media and trade unions on pensions over the last year or so – with accusations that employers are breaking their pension promises, and that too many employers do nothing at all. The TUC have rejected the notion of ‘voluntarism’ – claiming that without a move to employer compulsion, employers will continue to offer little or nothing.
The Government have monitored the debate and warned that this is a final chance for employers – that if the voluntary approach fails to deliver, compulsion could follow and have set up an Independent Pensions Commission, chaired by ex-CBI Chief Adair Turner, to monitor the success of their latest package of reforms.
The Conservatives see pensions as a way of landing some punches on Gordon Brown. David Willetts MP has made clear he is open to proposals by the NAPF, the IPPR (Labour’s favourite think tank) and Frank Field MP to radically streamline and simplify the UK’s state pension system. He has, however, also made it clear that Conservative Party support for these ideas is heavily contingent upon the support of the business community. All these reform proposals stem from the belief that the state pensions system is overly complex, difficult to understand and has poor take up and therefore requires radical simplification. Although the specific proposals vary – they all argue for a more generous universal first tier pension, the abolition of the state second pension and the means tested minimum income guarantee. They argue that this would make the retirement deal from the state more transparent whilst removing means testing and many of the disincentives to save within the current system.
Finally, the war appears to have spared the blushes of parliamentarians on all sides of the House, distracting the general public from news that taxpayers will have to make an emergency £20m contribution to MPs' pensions in the wake of the collapse of the stock market. The Government blamed the move, which has infuriated pensioners' groups, on the stock market but did also concede that the increase in MPs pension packages approved by the Commons last year had contributed to the deficit. Would that we could all have the pension rights of MPs.
The views expressed in this article are the views of the Jackson Consultancy Group.
Bye Bye for now...
Well, thanks for that Annabel. Super effort. A special thanks also for all of you who have read this far. It’s nice of you! Anyway, that’s about it for this issue you’ll be glad to hear. Let me know what you think of it (particularly if you like it, obviously) and maybe how you might like to see changes made to improve it. It’s our first attempt at something I hope will build into a reasonable record of what goes on throughout this important year for UK pensions. We’ll be putting the next one out around the beginning of May. See you when you’re older....
8 April 2003
* IPPR publication inview Winter 2002.
** Conservative Party news (682/03) - Michael Howard: Stakeholder Products may be unsuitable for savers 25 March 2003.
The information provided is based on Scottish Life’s understanding of current legislation and regulations, the Inland Revenue’s proposals and the Pensions Green Paper issued on 17 December 2002. These proposals are subject to consultation and may change in the future.