What’s Buzzing in Pensions- late February 2006
Private Pensions in Decline after 10 Years of Reform 1
It’s sobering to note as the appetite for pension reform continues to grow within government circles that the reality of what’s going on in our pension environment is nothing to write home about. In fact, the official figures just released look to me to be as good a reason as any to put any further pension reforms on hold for a while to give things a chance to recover a bit.
I’ve been plunged into this reflective mood since reading the official stats that are contained in the latest Family Resources Survey published by the Department for Work and Pensions (DWP). The headline figures of the number of people making private pension provision in the UK make for uncomfortable reading.
The latest figures, for the year 2004/5, show that only 46% of working-age men were contributing to non-state pensions in that year. That figure is down on previous years and the rate of decline is increasing too! The equivalent figures for the four previous years from 2000 to 2004 were 52%, 51%, 50% and 48% respectively. If that was a reading from the altimeter in a plane that was supposed to be climbing I guess the pilots would be worrying by now, not to mention the passengers. A drop to 46% from 52% in just five years is a drop of around 12% in the number of men saving with private pensions and ought to be a source of concern for those with the controls in their hands. The Stakeholder Pension lever that was pulled about halfway through this latest dive obviously didn’t work. I doubt the NPSS one will either. Sooner or later we’ll all have to be putting our parachutes on as pension provision becomes a matter of every man for himself.
Those of you who prefer to read rather than staring nervously out of the window at the propellers might like to download details of the Opportunity for all report by hitting the following link:
Local Government Pensions Strike on the Cards! 2
It’s all exclamation marks in the BeeLine headlines this week isn’t it? I don’t know if you know it or not, but over half of the people in active membership of UK occupational pension schemes work in the public sector *. The Local Government Pension Scheme (LGPS) is made up of a number of smaller schemes which between them have around 1.2 million members.
All’s not well on the local government pension front what with the Local Government Association (LGA) and the Office of the Deputy Prime Minister (the ODPM, no less) looking to make changes to pension arrangements before the costs levied on council tax payers go through the roof. While this probably comes as a bit of a relief to council tax payers it’s gone down badly with plenty of the trades unions, notably NAPO, T&G, UNISON, AMICUS and the GMB.
What’s brought it all to a head lately is that the changes, which seem unlikely to be to increase benefits or reduce contributions, are likely to be made sometime in 2007 and there is a period of consultation underway right now. The consultation started on 5th December 2005 and closes on 28th February 2006. The state of play of the negotiations at present is that the trade unions are about to start balloting their members on strike action.
So we seem to be heading for a Summer of Discontent as the ODPM and the LGA seek to reform the LGPS apparently against the wishes of the NAPO, T&G, UNISON, AMICUS and the GMB. A real clash of the titans in the world of acronyms, but try explaining it all to someone who doesn’t care…
CBI Pours Cold Water on Turner Proposals 3
The Confederation of British Industry (the CBI) has put its hat in the ring over the Turner proposals and argues that forcing companies into compulsory pension contributions would put hard-pressed firms, especially smaller ones, under great economic pressure and significantly raise labour costs while failing to boost savings levels overall.
For companies with existing schemes, particularly larger ones, the CBI thinks the increased costs of higher take up rates could actually lead to a levelling down of existing pension provision. That’s not a million miles from my own views as expressed on the BeeHive last week as I’d hope you’ll know.
The CBI believes its own voluntary-based proposals will deliver more pension value than Lord Turner's scheme. According to its spokesman,
“…forcing employers to contribute is neither fair, nor equitable or sensible. As the Pensions Commission says, it is not right to tell a 21-year-old striving to pay off his student debts, or saving for a deposit for a flat, that he must first save for his pension. So why should a small company be forced to pay into a pension scheme if doing so could put it out of business or prevent the creation of new jobs?
"The CBI believes there must be an equal right to opt out for both business and employee so individual economic realities can be taken into account. Our proposals are therefore designed to cajole employers, not compel them, into voluntarily contributing to an employee pension saving scheme."
In the CBI model, companies who choose to opt out will be required to explain their decision to employees, a process which could increase pension take-up rate.
"An active dialogue between employer and employee is also at the heart of the CBI model and, to give the voluntary approach additional 'bite' employers who decide to opt-out will have to explain to employees why they are doing so. In the post-Turner world, with sufficient incentives in place, many employers will not see opting out as a credible option."
As BeeLiners will know, under Lord Turner's proposals for a National Pensions Saving Scheme (NPSS), employees opting in to a pension scheme would contribute five per cent of their earnings - four per cent from their salary and one per cent from National Insurance tax relief. Employers would be compelled to pay another three per cent, a total contribution of eight per cent.
Using these levels as a reference point, the CBI has designed three proposals to ensure as many employees as possible are enrolled in a pension saving scheme. The first could apply to all firms while the Government should pick either of the second and third schemes as an additional incentive and help for companies with fewer than 250 employees.
The CBI opposes compulsory employer contributions because:
- The system of employer contributions demanded by Lord Turner will be unaffordable for many businesses who do not have a pension scheme. Smaller firms in particular would be hard hit and suddenly compelling them to find the money for pension contributions could push some to collapse.
- There will be pressure from employees for wage increases to compensate them for new and additional pension contributions. Where employers are unable to resist such demands they could find themselves paying an additional six or seven per cent in pension contributions and salary increases, not the three per cent envisaged by the Commission. This will be most harshly felt among small firms.
- Compulsory NPSS payments will also swell the costs of pension provision for employers who already provide schemes but are struggling with extra costs from rising pension fund deficits, the Pension Protection Fund levy and the demands of the Pensions Regulator.
- Higher take-up rates will increase costs for the majority of employers and many will feel forced to level down their contributions towards three per cent in existing schemes. There is a real risk this figure could become the norm, not the floor, for contributions - and compulsion could provoke a longer term shift away from tailored occupational provision.
- Unions will lobby vigorously to increase the employer contribution over time to meet their stated target for a compulsory ten per cent employer contribution.
- Evidence from Australia shows that in a compulsory pension system, there will be less motivation for the Government to provide tax reliefs for private pension savings, again undermining existing occupational arrangements.
- Without a consensus for compulsory employer contributions - which does not currently exist among political parties and key interest groups - the scheme might not prove durable in the long term, further destabilising a system which has suffered from 20 years of constant change.
TUC - CBI must not be allowed to sabotage pension plans 4
Responding to the CBI's attack on the Pensions Commission's recommendation to establish a National Pensions Savings Scheme (with a compulsory 3 per cent contribution from employers if employees do not opt out), TUC General Secretary Brendan Barber said:
'As the Turner Commission's lucid analysis has made clear, a key contributor to the sharp fall in pensions coverage is the retreat by employers. Without some modest compulsion, the race to the bottom can only continue as good employers are undercut by the bad who refuse to provide a pension for staff.
'Adair Turner was a distinguished CBI Director-General. When he says that this is a modest contribution that businesses can afford, ministers should take him seriously and dismiss this special interest pleading. No one should forget the CBI's similarly dire predictions of the impact of the minimum wage.
'More worryingly is the clear CBI admission that employers will try to persuade staff to opt out of the NPSS. The government should be very clear that this will not be tolerated and should not allow the CBI to sabotage future pension plans.'
That, of course, also echoes the sentiments behind some of the BeeLines we’ve written on this thorny subject over the last few weeks. There is obviously a very real risk that people will find themselves as ‘advised opt-outs’ if the implementation of the NPSS is rushed through without any clear thinking being undertaken first. There’s a real chance that we could end up with the worst of all worlds at the end of it all that neither employers nor unions will like. Interesting times!
27 February 2006
1. Department for Work and Pensions: 'Opportunity for all' report, Indicator 29 - People contributing to a non-state pension, 16 February 2006.
2. IPE press release 21 February 2006 - UK facing local government pensions strike
3. CBI news release 20 February 2006 - Compulsion is the wrong answer to pensions timebomb - CBI unveils viable alternatives
4. TUC press release 20 February 2006 - CBI must not be allowed to sabotage pension plans
* Government Actuary's Department - Occupational Pension Schemes 2004, The twelth survey by the Government Actuary
Any research and analysis included has been provided by us for our own purposes and the results of it are being made available only incidentally.