So that was pensions.......June 2003
Hi! Welcome to this latest issue of “So...”, our heroic attempt to summarise a busy year in pensions in monthly chunks. I’m pretty pleased to say that this (so far, fairly amateur) downloadable monthly magazine has, for all its faults, proved to be highly popular with BeeLiners. So popular, in fact, that we’re now considering really going to town on it some time soon and putting it out as a glossy downloadable E-Zine (trendy or what?), but for now it’s coming to you in its usual format of one long string of text.
As well as our working on the looks of “So...”, it’s become evident to me over the few months we’ve been up and running that the monthly summary seems to fall into two neat parts; that dealing with pensions issues in general and, more and more, stuff that’s specific to employer-sponsored schemes in particular. This isn’t surprising I suppose, as the pension rule book is currently being completely rewritten and so much of what is being undone relates to the way employer-sponsored schemes operate. To take account of this I’m happy to announce that as well as revamping the look and feel of the monthly issue of “So...”, we are also going to launch a sister monthly magazine aimed specifically at addressing the employer-sponsored pension markets. This glossy new E-Zine will also be available as a free download from the BeeHive and will, I hope, be just as popular as our existing monthly stuff. One thing this will do is bring both E-Zines down to an easily readable size. One of our problems at the moment is there is so much going on that, even in summary, it all amounts to quite a bit of reading.
For this issue, though, we are stuck with the old text-only format covering both pensions in general and employer-sponsored issues as well, and I apologise in advance for the length, but as I say, there’s a lot going on right now. This month I have the help not just of Annabel Berdy of the Jackson Consultancy, but also practically the whole of the Scottish Life pensions team up in Edinburgh, with articles from Liz Fleming, Jamie Clark, Caroline Kellas and James Miller.
Let’s kick-off with Annabel’s usual summary of the goings-on in Parliament:
This month in Parliament
A Pensions Minister has finally been appointed. After some initial confusion, (Pensions Week were not alone in thinking it was Des Browne MP) Malcolm Wicks MP was named as the man for the job. He is described as 'serious-minded and cerebral', and 'Labour's unsung guru of the family'. Previously an Employment Minister, he is also a member of the Fabian Society, the Co-operative Party and the Child Poverty Action Group.
This month also saw Rt Hon Andrew Smith MP’s statement to the Commons on the Government’s response to the Green Paper consultation. The package of measures aims to rebuild confidence in pensions, led by a new compensation scheme to protect the nine million members of final salary company schemes. The measures are a direct response to the record number of companies closing final salary pension schemes, and to increasing anger over workers losing their entire entitlement when companies go bust. The ‘Pensions Protection Fund’, based on the US model, will not come into effect until at least April 2005.
Worryingly, the US scheme sustained its largest ever loss of $11.3bn (£6.9bn) last year. So in order to avoid some of the ‘hazards’ that the US didn’t, civil servants are expected to suggest insuring no more than 90 per cent of each individual's pension – the level of protection offered with other financial products. They are also likely to urge consideration of capping the maximum annual individual benefit.
Although scheme protection has generally received support, the measures announced are only a very tentative step. Aside from proposals to implement protection for members of final salary schemes - only 17 per cent of which are open to new members - Smith’s statement contained no proposals to protect other pension funds. For example those in money purchase company pension schemes, which offer no guarantee on income at retirement. Nor was there anything to help those workers who have already lost some or all of their promised pension. In response to this last point the Government have said they cannot apply the new rules retrospectively.
The opinions of the main commentators have reflected this. The Consumers' Association, for example, welcomed the proposal but said the Government had failed to resolve wider issues affecting confidence in pensions. Sheila McKechnie, its director, said: 'If the Government thinks the action it has proposed solves the pension problem, then it either doesn't understand what the crisis is or it lacks the political courage to deal with it.' David Willetts MP, Shadow Secretary of State for Work and Pensions, welcomed some of the Government's proposals. However he did add that Smith's announcements were 'about insuring for failure, not planning for success' but added this did not entirely surprise him!
Also contained in the proposals were plans to cut the protection against inflation that applies to final salary pensions in payment by half from 5 to 2.5 per cent. In defence of the decision, which effectively means that the Government would be paying for its protection proposals by reducing benefits to future pensioners, Smith said it was a necessary ‘trade-off’ and that he believed the ‘average person’ would prefer “less inflation protection in the knowledge that their scheme is going to deliver a pension to them'.
Despite the Green Paper consultation and subsequent proposals the Government are aware that pensions problems may need a more radical and systemic solution. They have asked Adair Turner, the former head of the CBI, to produce an official report on the options available. Turner and his team (the Pensions Commission) have the task of recommending whether the voluntary system is still the most suitable, or whether there is a case for moving towards compulsion. The Commission have just published their work plan which sets out their remit in full. They will publish their first report on the state of UK pension provision in the spring of 2004 and expect to make full recommendations in two to three years time, possibly earlier.
One surprising revelation this month has been that the TUC are negotiating cuts to the pensions of their staff. The TUC have long attacked companies who have slashed benefits or wound up final salary pension schemes and have lobbied hard in favour of compulsion and protection, and so it came as quite a blow to staff when the TUC revealed an £8 million pension gap! Trustees are considering a reduction in the final salary scheme, which would require employees to work 30 years instead of 25 years to retire on half salary.
On a final note, Julian Brazier MP has moved from the Opposition Work and Pensions team to take on a new role in the Opposition Home Office team. Julian spoke on the panel at the Royal London/Scottish Life fringe event at the Conservative Party Conference last year, ‘The Next Pensions Act?’ Julian was a key proponent in setting up David Willetts' Pensions and Savings Advisory Group. We wish him all the best in his new role.
The views expressed in this article are the views of the Jackson Consultancy Group.
Thanks Annabel, super stuff as usual. Next up we have a couple of pieces by Liz Fleming covering the new pension proposals announced on 11 June and an update on the new information we’ve received this month concerning the Independent Pensions Commission run by Adair Turner:
The Pension Proposals - Where are we?
It’s been over six months since we first got the Government’s latest round of proposals to reform the private pension system in the UK. A lot has been written about the Revenue’s radical proposals for one unified tax regime which they intend to apply both prospectively and retrospectively - so to all new and existing pension schemes and arrangements in the UK. (You can find a lot of this elsewhere on the BeeHive). However, our excitement was tinged with real disappointment that the DWP had not taken the same radical approach.
After the initial consultation closed in March/April everything went a bit quiet until 11 June when Andrew Smith, the Secretary of State for Work and Pensions stood up in Parliament to outline the Government’s response to the Green Paper consultation (some of which had been trailed in the lead up). Proposals but no real detail. At the same time we got confirmation from the Revenue that A-Day would be 6 April 2005. That was detail which largely seemed to go unnoticed.
If you go to the Political Papers section of the BeeHive you’ll find summaries of all the proposals and responses - including Scottish Life’s, and the wider Royal London Group of which it is part.
So what’s next? Hopefully, we’ll receive the next round of Revenue consultation sometime in the Autumn. We know that the legislation implementing the tax changes will be in next year’s Finance Bill which usually goes through Parliament during April to July.
The estimated (but not confirmed) date of change for all the Green Paper proposals will be 6 April 2005 at the earliest. But there’s no real indication of when we’re going to get the detail.
Although we know more - we still don’t have the full picture. Roll on Penny Dropping Day.
The Independent Pensions Commission
Back in December the Government set up an Independent Pensions Commission. Chaired by Adair Turner, the Commission was given the remit of reviewing whether the current voluntary system for private pensions and long term savings in the UK was on track. The Commission will report regularly to the Secretary of State for Work and Pensions.
Towards the end of June the Commission issued their workplan outlining what’s going to be looked at, as well as indicating when the initial reports will be issued. An interim report will be issued next summer with the First Report being issued during 2005.
The work is being split into two phases. The first phase is, as you would expect, largely analytical - establishing demographic trends, savings patterns, retirement trends, the cost of private pension provision, expectations as well as some fairly sophisticated modeling work etc. This will all be used as the basis for the interim report allowing them to describe “the present situation, the trends in place, and the challenges which need to be met.“* From there the Commission’s focus will move to considering policy issues as well as developing recommendations. The Commission has also been asked to take into account the impact of the Green Paper proposals (which won’t actually be in place).
But, the Commission has not ruled out making recommendations before any report is issued.
We’ll keep you posted.
So, we’re not out of the woods yet, consultation-wise. In fact don’t believe anyone who tells you we’re nearing the end of the changes to our pensions system. To paraphrase Churchill, it may not even be the beginning of the end, but it looks as though it could be the end of the beginning. And, as if to emphasise the point, how about the following piece on the winding-up regulations that Jamie Clark has put together for us this month:
What a wind-up!
Unless you’ve been on a sabbatical to Mars, you’ll have noticed recently that a lot of Defined Benefit (DB) scheme members have been complaining about ‘lost’ pension benefits. These benefits have been lost as a result of their solvent employers winding up their occupational pension schemes.
The publication by the Department for Work and Pensions (DWP) of the exposure draft of ‘The Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc.) (Amendment) Regulations 2003 on 11 June, which applies to solvent employers winding up a DB pension scheme, brings some hope to scheme members. But the intention is that the Regulations will apply only to schemes which start to wind up after 11 June 2003 so there’s no help for those who have found their pension benefits reduced, sometimes drastically.
In the past, when a solvent employer decided to wind up a DB pension scheme, the only benefits which had to be secured completely were those of pensioners. For deferred members, only the Cash Equivalent Transfer Value (CETV), based on the Minimum Funding Requirement (MFR), had to be secured.
And that’s the problem - the DWP has confirmed what most of us already knew -‘…actuarial assumptions underpinning the MFR calculation are now out of date and CETVs based on the MFR are providing members with less protection than was originally envisaged.’ In other words, when a solvent employer winds up a DB scheme, the employees are not getting what they should.
These Regulations are an attempt to address this problem as, from the effective date of the Regulations, both pensioner and deferred members have to have their benefits fully bought. In other words, there should be no reduction in the benefits (with one exception - the Trustees can agree a lower amount if it puts the employer at the risk of insolvency). Is this good news for scheme members? I think ‘Yes’, and ‘No’.
It’s certainly good news for anyone who is currently an active member of a DB scheme as it offers an added layer of security. But on the flip side, employers may well see this as just another piece of seemingly endless legislation which will mean increased costs (the DWP estimate between £50m and £100m in total**). This, coupled with the need for extra funding due to atrocious economic conditions could well be the proverbial straw on the camel’s back.
Employers with final salary schemes now face the prospect of either recosting their schemes to include the provisions of the Regulations or simply closing the schemes to new entrants and reducing, or completely stopping, the future accrual of benefits. If cost is an issue for the employer, it seems the latter will be the most obvious choice which can only be a bad thing for employees.
Will these new Regulations mean that more employers will go down the money purchase route? Figures from the DWP Consultation suggest that DB schemes are confined mainly to larger firms so hopefully they will be able to afford to keep their schemes going. For the middle-sized and smaller firms, there will certainly be a need to review their DB schemes and with A-Day drawing ever nearer, the need for sound advice is vital.
The run-up to A-Day, as Jamie says is going to be a busy time all round, with most companies in the UK affected in one way or another. It’s good for advisers though, which is why it’s so important for everyone involved to keep abreast of these changes. Caroline Kellas has been keeping an eye on what’s been going on over at that other regulator, the Occupational Pensions Regulatory Authority (Opra), for us. You’ll be interested in what she’s writing about this month, I’m sure, unless you’re already up to speed on their new traffic light system:
Opra propose simplified rule
IFAs play a key role in the running of any occupational pension scheme as they help to control the running of the scheme and co-ordinate all the work being carried out by the scheme administrator, the accountants and the actuaries. In addition to this Trustees will naturally look to their financial advisers for guidance. On top of all of this, since the introduction of the Pensions Act 1995, scheme auditors and accountants have been “obliged” to blow the whistle on any breaches in relevant legislation.
Opra currently have guidance notes for scheme actuaries and auditors on their duties, this guidance note is called “Note 1”, and was last revised in 1999. Opra have now said that they feel they have enough information and experience to change their current practice. They have also said the level of compliance has greatly increased since 1997. Opra feel that there is now a need to move the boundaries between what breaches they consider to be materially significant and therefore still need to be reported to them and what breaches can simply be sorted out by Trustees, with the help of their advisers. Opra have therefore recently published a draft copy of a revised “Note 1”.
Opra still expects Trustees to stick within the law, however they are not looking for reports of one-off or unimportant breaches that are not seen as a significant risk to member’s benefits. In practice, it is hoped that the number of breaches being reported to them will reduce.
To assist professional advisers, Opra is proposing a new traffic light system. The draft “Note 1” gives some examples of different scenarios under each of the traffic-light colour for three different circumstances where
- the scheme is ongoing
- the scheme is winding up
- breaches of trust law and legislation other than the Pensions Act have occurred.
The following should help to explain how each of the traffic light colours would work:
‘Red’ reporting scenarios involve breaches or circumstances that Opra regards as materially significant. This would include such things as persistent non-payment of contributions by the employer, failure to notify members where contributions remain outstanding for 60 days and matters indicating potential misuse of assets or contributions. In other words, anything that puts the member’s benefits at significant risk.
’Amber’ issues involve less clear-cut situations. The scheme auditor or scheme actuary will need to take into account their knowledge of the situation and the scheme in deciding whether the matter is likely to be of significance to Opra. These will include such scenarios as several green reporting breaches which suggest that the Trustees may have insufficient knowledge or skills or where Trustees have been hindered in their attempts to comply with the legislation by their advisers or service providers.
’Green’ scenarios involve breaches or other matters about which Opra would not expect to receive a report. A couple of examples of breaches that would fall into this category would be insignificant or trivial underpayments of contributions that have now been corrected and isolated or unintentional administration lapses in an otherwise well run scheme. In these circumstances member’s benefits are not at risk.
Right, so there’s a lot going on with occupational pensions as we said earlier, but I don’t think any of us has experienced such wholesale change before. It almost appears that practically everything is up for grabs at the moment. Take maternity leave and paternity leave for that matter. Why? Well, the rules there have just changed too, and guess what? There’s a knock-on effect on pensions. James Miller explains in his following article:
Maternity Leave, Paternity Leave & Pension Rights – What’s all the fuss?
From the 6 April 2003 employment law governing maternity leave has changed. New rights were also introduced for males under paternity leave. This article highlights the main changes for you and how this impacts on Occupational and Personal Pensions.
So what’s actually changed?
The main changes are:
- Ordinary Maternity Leave has increased from 18 weeks to 26 weeks for employees irrespective of their length of service with their employer
- Additional Maternity Leave - employees additional maternity leave has increased from 22 weeks to 26 weeks provided they have completed 26 weeks’ continuous service by the start of the 14th week before the expected week of childbirth
- Paternity Leave - fathers are now entitled to take two weeks unpaid paternity leave at any time from the date the baby was born up to 8 weeks from birth
How does this impact on Occupational & Personal Pensions?
Under occupational pensions, employers will see an increase in pension costs as a result of the extension to ordinary maternity leave. However, the situation is less clear under personal pensions. Employer contributions must continue to be based on the employee’s pay before any period of maternity leave, plus any improvements granted during absence. Where the employer is contractually obligated to contribute to the employee’s personal pension, contributions should continue at the full rate i.e. based on notional pay.
Paternity Leave is pensionable although any leave granted is usually unpaid. There is still no compulsion for an employee to contribute to an Occupational Pension Scheme during paternity leave. Under a personal pension employees are free to pay whatever level of contributions they choose during maternity leave or paternity leave subject to the rules of their scheme.
The Department of Trade and Industry (DTI) have published a number of leaflets on the changes introduced. These include:
- Changes to Maternity Rights
- Maternity Rights: A guide for employers and employees
- Parental Leave
These can be downloaded from the DTI’s website using the link below:
So, that was pensions in June 2003. Whew! There’s a lot going on, and more to come if I’m any judge. It’s not all here in this summary, of course, but you’ll find all the detail you could probably ever need if you trawl through back issues of the BeeLines you’ll find on the BeeHive site.
If you’re just off on your annual holidays in the next few weeks, just enjoy yourselves why don’t you, and don’t worry about pensions. Chill out for a while and don’t even buy the papers. While you’re away we’ll still be here in our Fair Isle tanktops and with our knotted hankies on our heads, keeping a record of all the pensions changes for you to read up on upon your return. Pension legislation never stops evolving, and anyway, holidays are for wimps!
8 July 2003
The information provided is based on Scottish Life’s understanding of the relevant legislation and regulations and may be subject to change as a result of changes in legislation and practice.
*Independent Pensions Commission - Workplan - June 2003.
A full copy of the Workplan is available on the DWP website using the link below;
** The Pensions Group - The Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc.) (Amendment) Regulations 2003 - Consultation on draft regulations.