What’s Buzzing in Pensions? Late September 2005
Consultation on contracted-out rebates
Every five years the Government Actuary publishes proposals for calculating the rebates for contracted-out pension arrangements for the next five-year period. The next five-year period starts in April 2007 and a consultation on the proposals for valuing what S2P benefits foregone by those contracting-out after that date was published by the Government Actuary last week on 19th September. Basically we’re about to be told whether rebates will increase as much as many have been saying they should because of the shift in economic and demographic assumptions since the rebates were last set three years ago. Still we’ll see what the number crunchers come up with soon enough and then we’ll be able to worry about whether contracting-out or contracting-in is what we should do as individuals. Anyone who wants to read the full Monty can get the consultation document straight from the horse’s mouth by following the link here (1):
Pensions Policy Institute publishes key pension facts
The Pensions Policy Institute (PPI) has today published a short commentary on the pension reform debate. The PPI is an independent body that does not lobby for any particular outcome to pension issues, but is simply concerned that if we are to have a sustainable pension system it will need to be designed in the light of the right facts and analysis. I like that and I’ve always been a big supporter of what they do.
This latest commentary is underpinned by the institute’s work on pension reform over the last three years and recent detailed economic analysis. The paper they’ve produced today contains some key facts intended to inform the reform debate and I thought you’d be interested to see them. I’ve listed them here:
- Only half of women over state pension age receive the full Basic State Pension compared to 9 out of 10 men. Over time, more women will get more entitlement, but women will on average always fare worse than men.
- Over 3.5 million households are now eligible for Pension Credit. The number is expected to keep growing, by around one-third over the next 10 years. In estimating future costs, the Government currently assumes that no more than 75% of those eligible will claim Pension Credit.
- The UK is planning to spend a constant share of GDP on state pension and benefits to older people over the next 50 years, while the number of people over State pension age increases by 50%.
- Around 15 million working age people have a contribution going into an occupational or personal pension. Around 20 million do not. So state provision will continue to be a large part of retirement income for most people and many people will depend on it.
- Tax relief on pension contributions costs around £16bn a year. 55% of it goes to 2.5 million high rate taxpayers; 45% goes to 13 million lower rate taxpayers. In total the net cost of all tax advantages for pensions is around £19bn a year. This cost is not counted in Government estimates of future expenditure.
- Today’s 40 year olds are as likely to live beyond age 70 as their parents are to live beyond age 65. One quarter of 40-year old women are expected to live beyond age 95.
- After the proposed reforms, the average occupational pension for a public service worker will be worth an additional 3% to 18% of salary compared to the average private sector worker’s pension.
The PPI paper expands on all of these points and if you want to you can download a copy of it and any of the other papers and reports produced by the institute by following this link (2):
Unions draw line in sand on public sector pension changes
Unison, by far the largest public sector union, has called what has been referred to as a ‘Council of War’ of around one hundred activists from around the country to prepare for the possibility of a national strike over Government proposals to implement changes to public sector pension schemes. The Government as an employer is now the largest provider of final-salary pensions in the UK; more than half of those lucky enough to be in a defined benefit scheme now work for Government.
This is all following the Trades Union Congress of a couple of weeks ago and the Labour Party Conference which takes place this week. For those of you who don’t know about all the issues surrounding this here’s a sort of quick guide to what’s going on.
The Government, like every other employer promising final-salary pensions to employees, is worried about its ability to afford to pay for the generous promises it’s made to people. They too have been caught out by the unhappy coincidence of the demographic tidal wave and unprecedented improvements in general longevity, both of which are about to hit us big time. Like other employers they are considering taking steps to lessen the financial impact of being too generous and are trying to step back a bit from the brink.
There are loads of ways of doing this, the most extreme being to simply can the schemes and replace them with less generous arrangements. This is the kind of thing that’s happening all over at the moment as you know as employers across the land batten down the hatches. The Government isn’t considering anything so extreme, though. Instead they’re thinking of either increasing the age at which public servants will be able to retire, or looking at increasing the contribution people make towards their pensions.
This ‘attack on public sector pension schemes’ appears to be unacceptable to thirteen public sector unions (who represent three million employees) and they’re uniting against it. That’s about all you need to know about it all I guess, except that it will probably clutter up acres of newsprint and news airtime before it finally reaches its conclusion. It may even lead to a strike, who knows? In case that ever happens and for some reason or other you don’t notice we’ll keep an eye on it all for you and let you know how it all pans out. (3)
European pensions Directive adopted by 20 EU states
Charlie McCreevy, internal markets chief at the European Commission, said last week that Europe has a pension timebomb ticking which looks set to “explode” in about 2010. If that doesn’t sound too much on the positive side to you that’s really because it’s not meant to I guess. It’s kind of a wake-up call to us all.
A European directive aimed at creating an internal market for the Member States to enable citizens to take more control over their own retirement must soon be incorporated in the legislation of all EU member states. In fact, 20 European Union countries look like they will be “on board” with the pension fund directive by the end of the year. You’ll know that much of what we saw in the 2004 Pensions Act was driven by our need to comply with these requirements; the Scheme-Specific Funding Requirement is being introduced, for example, as part of what the UK must do to comply.
Any Member State ignoring the directive – which officially came into force on 22nd September 2005 - will get hammered with various warnings according to EU regulations. Thankfully this won’t be the case for the UK as we’ve pretty much implemented the provisions of the Directive right down the line.
According to Charlie McCreevy the Directive is only a part of the necessary framework, but “ultimately however people need to take responsibility while being assisted by forward-looking policies.” (4)
NAPF proposes a new Standing Commission for pensions
The National Association of Pension Funds (NAPF) has published a report recommending that the politics should be taken out of pensions. It could be done, they think, in much the same way as has been the case with the Bank of England setting interest rates through the Monetary Policy Committee. An independent Pensions Standing Commission could provide an independent voice facilitating politically important decisions.
Christine Farnish, Chief Executive of the NAPF, said last week that:
“One of the reasons our pensions system is in such poor health is that decisions have too often been taken without the benefit of independent advice aimed at ensuring long term continuity and sustainability. An independent Pensions Standing Commission would provide such advice, based on the depth of understanding of its members.”
She also said that:
“For years, successive governments have introduced new pension rules with the best of intentions, but not with the best of results.” (5)
I am indebted to my good friend James Jones-Tinsley of Bates Investment Services Limited for letting me know that having printed out all of the pensions technical pages that have so far been published on Her Majesty’s Revenue & Customs’ website, including the glossary, the pile of paper produced by his printer stands four inches thick on his desk. You’ll know from recent BeeLines on the subject that the task of writing out all of the rules governing our new simplified pension system is far from over as yet. What are the odds on James’ pile of paper reaching six or even eight inches before too long I wonder? You wouldn’t bet against it would you?
26 September 2005
(1) GAD Press release dated 19 September 2005 - Consultation on contracted-out rebates
(2) Pensions Policy Institute website - A commentary on the pension reform debate
(3) Guardian Unlimited 14 September 2005 - Unions threaten 'biggest strike since 1926'
(4) IPE - 22 September 2005
(5) NAPF Press release dated 14 September 2005 - NAPF calls for a Pensions Standing Commission
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