Integrated schemes and pension clawbacks
His Bill is intended to ‘make provision about pension clawbacks’, something that would probably sound pure gobbledegook to most MPs, let alone normal people. So it was brave of him to try to get people excited about what appears to be an obscure and very dark corner of the murky world of pensions. But I’m glad he’s having a go and getting yet another pension issue a good airing in public debate. I for one will be following the progress of this Bill very closely, not to see if it ends in a change of legislation, which would be highly unlikely, but rather to see if it sparks off a wider appreciation of some of the seemingly innocuous detail surrounding pensions that can have so profound an effect on peoples’ lives.
Most people in the UK pension community refer to the schemes your man Pollard is having a poke at as being ‘integrated’ schemes. That is, they are final-salary pension schemes that promise a pension benefit calculated as a proportion of earnings at or near retirement, but that the actual amount of pension paid out by the scheme is reduced to take account of the State pension that is payable to the individual.
To have a run at that from another direction: a scheme might promise forty eightieths of final-salary to someone earning £30,000 at retirement, so their pension would be £15,000 a year in a ‘normal’ final-salary scheme. What an ‘integrated’ scheme would say is “Well, the pension provided, when added to the State pension you are entitled to, will take you up to £15,000 a year in total”, or something like that. So, to the uninitiated the pension in both cases would be half of the employee’s final salary, but in one case the pension scheme would provide all of it (and the State pension would be paid on top of it), but in the other the pension scheme would only provide the amount required in excess of the State pension. Anyway, according to the National Association of Pension Funds (the NAPF) just under half of all private sector pension schemes in the UK operate in this ‘integrated’ way.
Kerry Pollard and others refer to this practice as ‘clawback’, which is another (and logical) way of looking at it, but does, of course, have the unfortunate effect of confusing people in the industry who are hooked into their own language where ‘clawback’ means other things entirely. It’s best not to think too closely about these things, though, it can really do your head in if you’re not careful.
Anyway, this Bill points out the obvious outcomes of schemes of this type are that they are cheaper for employers to run (because the real benefits are less), and that for the lower-paid and part-timers in the workforce the effect of the reduction in the employer’s financial commitment to their pensions is the most severe. In Plain English, integrated schemes don’t reduce the pensions of the highly-paid in the same proportion that they do for the lower-paid. Mr Pollard thinks this is unfair as, he points out, did the legislators in the Republic of Ireland when they knocked ‘clawbacks’ on the head a few years ago.
It looks as though a number of trades unions are already getting on this particular bandwagon and that the wider debate on the issue has already begun. Look out for it in your newspapers over the summer in between the bits about Iraq and Big Brother. Alternatively pop back to the BeeHive now and then where I guess I’ll keep posting regular updates on it. After all, that’s what being a pensions blogger is all about.....
27 July 2004
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