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Response to the Governments Green Paper - Strengthening the Pensions Framework
"A New Contract for Welfare: Partnership in Pensions" Response to the Government's Green Paper
Jon Bridger - March 1999.For further information, please contact Jon Bridger at the Cheltenham office.
Summary of Barnett Waddingham Response
Proposed changes to State benefits
- We support the Government's proposals to re-target State benefits towards those individuals on the lowest incomes, with recognition for carers and disabled people.
Stakeholder pension schemes
- We welcome the introduction of minimum ("CAT") standards for stakeholder schemes.
- We are not convinced about the benefits of operating stakeholder pension schemes within a trust framework. We suspect the role of the trustees will be little more than "box ticking" to ensure compliance and we think that these compliance requirements could be incorporated within the minimum "CAT" standards.
- We think that employers with existing Group Personal Pension arrangements should be able to transfer, or convert, these arrangements to stakeholder pension schemes with the minimum amount of disruption and cost to either employees or employer.
Education and trust
- We support the Government's proposals for financial literacy, including pensions education, to be included in the National Curriculum. We believe that education lies at the heart of determining the success of the new proposals.
- In addition we believe that the best way to achieve better education is through greater simplicity which, fundamentally, means simplifying the past as well as the future.
- We do, however, think that the proposal to provide individuals with a combined pension forecast (covering State pensions, occupational pensions and individual pension provision) is impractical and unworkable.
"Quality in Pensions" accreditation for occupational pension schemes
- Whilst we believe that there would be some merit in setting standards for "trustee training" and "communications" we think that both the "benefit level" and "eligibility" criteria are impractical. Fundamentally though, we feel that the introduction of QiP will simply perpetuate the bureaucracy that is continually forced upon occupational pension schemes and therefore we think the Quality in Pensions accreditation should be dropped.
The role of occupational pension schemes in future pension provision
- The Government is seeking to encourage membership of occupational pension schemes but we see little in the Government's proposals to encourage employers to establish new, or retain existing, occupational pension schemes.
- We would like to see more practical evidence of the Government's commitment to occupational pension schemes, supported by both the DSS and the Treasury, together with a significant easing of the regulatory burden on employers.
- Given the right support from the Government, we believe that occupational pension schemes will continue to deliver valuable and secure benefits at an affordable cost.
"A New Contract for Welfare: Partnership in Pensions" Response to the Government's Green Paper
1. Proposed changes to State Benefits
1.1 We support the Government's proposed changes to SERPS and the introduction of the State Second Pension. The re-targeting of these benefits towards those individuals on the lowest incomes, together with recognition for carers and disabled people, is to be welcomed.
1.2 However, the proposed changes to the SERPS will inevitably mean changes to the present contracting-out arrangements. At this stage, the Green Paper does not go in to detail but we would urge the Government to try and keep the contracting-out regime (contracting-out rebates, reference scheme test etc) as simple as possible.
2. Stakeholder pension schemes
2.1 We welcome the introduction of minimum standards ("CAT") for stakeholder pension schemes.
2.2 However, we are less sure about the proposal to operate stakeholder pension schemes within a trust framework. From the information provided in the Green Paper, the role of the trustees will be little more than "box ticking" to ensure compliance; it seems to us that a lot of these requirements could be incorporated within the minimum standards which all stakeholder pension schemes will have to meet. For example, what role is the Statement of Investment Principles supposed to play? Surely a clear description of the investment choices available to individuals could be made a requirement of the "CAT" standard.
2.3 The division of responsibility for investment strategy between the trustees and individual members of a money purchase pension arrangement is a major issue which the pension industry has been grappling with for some time. This division of responsibility is open to a variety of legal interpretation and seems to be another reason why the trust framework would be impractical.
2.4 Without the "trust wrapper" stakeholder pension schemes become little more than personal pensions under another name (albeit with an improved set of terms and conditions) although we accept that a new name is probably to be welcomed as part of the drive to restore the public's confidence in the pension industry following the mis-selling of personal pensions.
2.5 We would also welcome proposals which would allow employers with existing Group Personal Pension arrangements to be able to transfer, or convert, these arrangements to stakeholder pension schemes with the minimum amount of disruption and cost to either employees or employers.
2.6 The Green Paper also makes no mention of how an individual's fund will be used to secure a pension at retirement. Currently the level of annuity rates will significantly affect the amount of pension that a member will receive and these rates can vary significantly between different providers. There needs to be consideration over the options available at retirement and, if so, how these would be communicated and implemented.
3. Education and trust
3.1 Chapter Ten of the Green Paper is, in our view, one of the most important and challenging aspects of the Green Paper. Education and trust lie at the heart of determining the success of the new proposals. In support of paragraph 30 of Chapter Ten we believe that financial literacy, including pensions education, must be embedded in the National Curriculum in order to give successive generations the knowledge which they will need in order to embrace the Government's proposals.
3.2 In addition we believe that the best way to achieve better education is through greater simplicity which, fundamentally, means simplifying the past as well as the future. Any simplification for the future is almost worthless if the past is left unaltered.
3.3 We also have some reservations in relation to the proposal to provide a combined pension forecast. Over a working lifetime, an individual could build up pension benefits from a large number of different sources many of which will provide different types of benefits. These differences could be due to the fundamental nature of the benefit (final salary versus money purchase) or aspects of benefit design (retirement age, pension increases etc.). In many cases, a valid comparison will be almost impossible. In addition, who would be responsible for providing (and collecting) all the necessary information? At best, we think the Government could prescribe the format of the forecast from each individual source but a combined forecast is impractical and unworkable.
4. Quality in Pensions accreditation for occupational pension schemes
4.1 The Green Paper discusses the introduction of a Quality in Pensions ("QiP") accreditation. It describes the purpose of this as: -
- giving existing members confidence that their scheme is well run, meets certain benefit standards and has good communications:
- helping new employees to decide whether to join their employer's scheme;
- encouraging new employees to join.
4.2 The proposed criteria are: -
- Benefit level
- Eligibility
- Trustee training
- Member representation on trustee boards
- Good communication with members
The Green Paper says there will be a further consultation paper on the QiP but we set out below our initial comments on these proposals.
4.3 Benefit Level
The proposed criteria in respect of benefit levels is a pension of 50% of final salary after a full career. This criteria would prevent money purchase schemes from attaining the QiP because they are not able to guarantee a level of pension as a percentage of earnings.
There will have to be further consideration of the definition of "final salary". Different schemes use different definitions; for example some include overtime bonuses etc. whilst others do not. A lower accrual rate may result in a larger pension if more earnings are included in the final salary definition.
We are not sure why it is thought necessary to set a criteria for benefit level at all. If the target is set at any meaningful level, there will be some employers who will be willing to provide benefits above that level, and some who currently operate final salary schemes who will not. These employers are very likely to discontinue their final salary scheme (rather than operate a 'substandard' scheme), knowing their employees can all join a stakeholder pension scheme instead. The employees therefore have less choice, and we believe this part of the proposal is contrary to the Government's stated objective of supporting final salary schemes.
4.4 Eligibility
The proposed criteria is that the scheme must be open to all permanent employees. We do not agree with this proposal as it may be appropriate for an employer to have different schemes for different types of employees or indeed to have Personal Pensions or Stakeholder pensions for some employees. This does not make the scheme any better or worse for the members who are eligible to join.
4.5 Trustee Training
We believe that trustee training is very important and therefore we support the Government's proposal which will help to encourage trustee training.
4.6 Member Representation on trustee boards
We do not believe that there is any need to go further than the Member Nominated Trustee regulations. Having member nominated trustees is not necessarily indicative of a well-run trustee board and, in some cases, members' interests will be better served by the appointment an independent trustee.
4.7 Communication to Members
Clear and regular communication with members is very important for pension schemes and therefore, although this criteria is partly subjective and will need further consideration, we support the Government's proposals in this area.
4.8 Overall, therefore, whilst we believe that there would be some merit in setting standards for "trustee training" and "communications", we think that both the "benefit level" and "eligibility" criteria are impractical. Fundamentally, though, we feel that the introduction of QiP will simply perpetuate the bureaucracy that is continually forced upon occupational pension schemes and as a result we think that the QiP accreditation should be dropped.
5. The role of occupational pension schemes in future pension provision
5.1 One of the recurring themes of this Government and previous administrations relates to the mixed messages given to occupational pension schemes about their role in the country's future pension provision. In this respect, the Green Paper is no different.
5.2 On the one hand, occupational pension schemes come in for high praise. Paragraph 19 of Chapter Two refers to occupational pension schemes as one of the "great welfare success stories of this century". On the other hand, the Green Paper suggests that "because of labour market changes, occupational pensions are, over a number of years, likely to decline in number". We do not believe that future labour market changes will automatically signal a decline in occupational pension schemes. On the contrary, we would argue that occupational schemes, given the right support, are well placed to adapt to changing patterns of employment. In fact many employers have done just that whilst still working within the occupational pension scheme regulatory framework.
5.3 The Government promises its support of occupational pension schemes in Chapter Eight of the Green Paper: "In our manifesto, we promised to support and strengthen the framework for occupational pensions. We are committed to create an environment in which they can flourish in line with our wider economic strategy of promoting national and international economic stability and improving productivity performance."
5.4 Despite this reassuring message, within a matter of months of coming to power, the Chancellor proceeded to abolish the tax credit on UK equity dividends available to pension schemes and hence threatened the continued support of employers to provide occupational pension schemes.
5.5 Chapter Eight of the Green Paper also seeks to encourage membership of occupational schemes. But what is there to encourage employers to establish new, or retain existing, occupational pension schemes? Whilst there are good reasons for making stakeholder pension schemes as attractive as possible, there is a very real danger that this will be at the expense of occupational pension schemes. Obviously the Government are keen for stakeholder pension schemes to be successful, but will this necessarily "ensure that tomorrow's pensioners can retire in security"?
5.6 Fundamentally, stakeholder pensions are money purchase pension arrangements which means that they cannot be relied upon to ensure security in retirement. Importantly, the pensions available from these schemes will be at the mercy of annuity rates at the point of retirement - an important feature of the operation of these arrangements which is not covered by the Green Paper. Greater security can be provided by a final salary pension arrangement which, as the Green Paper acknowledges, requires an organisation to provide a funding commitment, and accept the financial risk, and hence is more appropriate for an occupational scheme.
5.7 The Green Paper also acknowledges on page 25 that recent restructuring of occupational schemes has resulted in some employers taking the opportunity to reduce their costs. The natural extension of this is for employers to withdraw from occupational pension provision altogether. In fact some employers have already done this to escape the burden of compliance currently imposed on occupational pension schemes. There is a very real danger that the proposals put forward in the Green Paper will be another example of political intervention undermining the provision of occupational scheme benefits.
5.8 In addition, we have serious concerns that the stakeholder proposals might cause employers with employees on low incomes to switch from a defined benefit arrangement to a stakeholder (defined contribution) scheme and hence pass the investment risk on to a group of individuals who are less able to afford it.
5.9 Sections 13 and 14 of Chapter Eight discuss possible ways to allow employers to make membership of their occupational scheme compulsory. Fundamentally, we believe that the employer should be allowed to establish its own eligibility criteria so that the employer can target particular benefits at specific sections of its workforce. However once these eligibility conditions are satisfied we are happy to support compulsory membership provided that employees have the ability to opt-out. We think that it will be very difficult to specify strict opt-out criteria and would suggest that individual's who opt-out are simply given a clear statement of the benefits being given up including a comment that the individual may wish to consider obtaining individual financial advice.
5.10 In conclusion, therefore, we see little in the Green Paper to encourage employers to provide occupational pension schemes. A number of minor changes to the regulatory environment are proposed but this only represents minor tinkering and in some cases will increase the regulatory burden on occupational pension schemes. We would like to see more practical evidence of the Government's commitment to occupational pension schemes than has been demonstrated by the Government's actions since coming to power or in the Green Paper. It is all very well introducing measures to encourage membership of occupational pension schemes but this will be in vain if employers are not encouraged to continue with existing schemes or to set them up in the first place.
Jon Bridger - March 1999. For further information, please contact Jon Bridger at the Cheltenham office.