The world is a very uncertain place at the moment and strangely that might mean a period of relative stability for UK pension regulations. The main reason for optimism about such stability is simply that Parliament will have to focus so heavily on Brexit issues that there will be no time for another Pensions Act any time soon. The second reason is that there doesn’t seem to be any real appetite for any major change, despite the loud shouting from various parties on many, many sides. Read more »
Posts Tagged ‘Politics’
Politics affects everything!
The United Kingdom General Election will be held on 7 May 2015 to elect the 56th parliament of the United Kingdom. Voting will also take place in all parliamentary constituencies of the United Kingdom to elect MPs.
If you live in this world then politics affects you, here is my very simple explanation! Read more »
The term nanny state was probably coined by the Conservative British MP Iain Macleod who referred to “what I like to call the nanny state” in his column “Quoodle” in the December 3, 1965, edition of The Spectator.
I’m not sure when nanny took on the slightly pejorative sense of an interfering busybody dispensing unwanted advice and meddling where they have no business to meddle, as opposed to the the all singing, all dancing and not entirely unattractive Mary Poppins, spreading order where once there was chaos, joy where once there was sorrow and Dick van Dyck were once there were cockneys.
So if the concept of a nanny is slightly schizophrenic so too are my feelings towards the nanny state.
I like to strike the pose of a Libertarian (and indeed in my wilder imaginings, a Libertine), bridling with a righteous fury when I hear news of some interfering busybody or other lambasting the over 65’s for having a second glass of sherry of an evening, or suggesting that we should embrace the travesty of food without salt.
We have these do-gooders in the pensions sphere as well, as a recent article in the Sunday Times makes clear. The article states that: Read more »
If asked about my political views, liberal is not a word that would ever feature in my response. No subscription to the Guardian newspaper here.
However, on reading the discussion paper from Philip Booth and Corin Taylor for the Institute of Economic Affairs (IEA) on “How the older generation should suffer its share of the cuts”, I have had to reassess my thoughts on the virtues of beard growing and sandals.
In short, the paper recommends the abolition of a number of benefits currently provided to older people, namely
- Certain non-cash benefits (free bus travel, free TV licences and the winter fuel allowance);
- Married couples allowance for older people;
- The age adjusted tax-free income allowance; and
- The earnings link to state pensions (which hasn’t even been re-introduced yet!);
The paper also recommends the state pension age is increased to 66 in 2015, a reduction in public sector pension contributions and an accrual rate of 1/45th for future build up of state pension entitlement. Wow – don’t hold back now guys, say what you really think!
Given the need to reduce the national debt, it is right that ancillary benefits paid to pensioners such as free bus travel and free TV licences come under scrutiny. However, it is unlikely that a government of any persuasion is likely to threaten the winter fuel allowance.
I welcomed the proposal in October 2010 to consider a universal state pension of around £140 per week and so would view the proposed use of an accrual system to be a retrograde step.
The comments on the triple lock of increases applying to the state pension seem flawed. Firstly, the price inflation element of the lock changes to CPI from 2012, which is expected to be less valuable than RPI. This fact seems to have been missed, though it does not appear to affect the estimated cost saving.
The estimated cost saving on excluding the link to earnings also assumes wage growth of 2.5% per annum above inflation, which is certainly higher than I would expect – therefore the saving is likely to be significantly less than the reported £5.6 billion per annum.
Some of the other figures seemed to have been produced like a rabbit out of a hat. For example, apparently a conservative estimate of the annual saving on increasing the state pension age to 66 by 2015 would be about £5 billion – this figure is provided without any justification.
The paper does make some bold suggestions in the pensions arena which are certainly worthy of further consideration. Firstly that the full costs of all pension promises should be revealed. I agree that the current cost is being pulled down by over optimistic assumptions about future investment return and await with interest the release of Lord Hutton’s report on 10 March. The removal of final salary linkage is not enough to stem the tide of rising costs and any move to Career Average accrual is only postponing more difficult decisions for a later date.
Secondly, the paper recommends that individual organisations and councils are allowed to negotiate individual pension arrangements with their employees. This would certainly test the value of pension provision – how much more salary would a public sector employer be prepared to offer in return for lower pension contributions? If NEST is enough, then why shouldn’t organisations be allowed to offer more salary in return for lower pension contributions?
In times of economic difficulty, it would seem that suggestions on how to save money are becoming more aggressive. And I am all for a bit of debate, I just think the debates surrounding some of the more outlandish ideas contained here are likely to be short.
If we were to compare the developments in UK pensions in 2010 to a football match, it might be described as a classic game of two halves – with the half time whistle being blown a little early in May for the General Election.
Unlike most football games, there was a new coalition referee for the second-half who decided that some of the goals in the first half were under review. If fans were feeling a little cheated at this point, they soon got over it as the second half began with a flurry of events, announcements, consultations, surveys, opinions, discussions, guidance, strikes and so on – I even recall someone saying at a meeting in June that they were unable to offer an opinion on the market because they had been on holiday for a week.
With so much having happened in 2010, and as we begin the countdown to Christmas and the New Year, we thought it might be useful to look back, sort the fact from the fiction and offer a post match summary of what actually happened.
Please let us know if we have missed anything out, what’s affected you most or what is likely to go down as the big story of 2010 in years to come – there’s plenty to choose from.
A new Government
In the first four months of the year, under Gordon Brown’s leadership, the DWP published regulations for Automatic Enrolment and National Employment Savings Trust (NEST) and confirmed that the option to contract out of the additional State Pension into a Defined Contribution pension scheme would be abolished from 6 April 2012.
But did it all matter when, after 6 days of uncomfortable behind-the-scenes negotiations, the Labour Government was replaced by the newly formed Conservative and Lib Deb Coalition on 12th May.
With the new government came a new lineup under David Cameron: George Osborne as the Chancellor of the Exchequer, Iain Duncan Smith as Secretary of State for Work & Pensions and Steve Webb as Minister for Pensions.
Some strong statements and intentions followed soon afterwards. IDS was first up with his vision for improving the quality of life by phasing out the default retirement age, ending compulsory annuitisation at age 75 and, from April 2011, the Basic State Pension was to rise by the minimum of prices, earnings or 2.5%, whichever is higher. He also committed to making automatic enrolment and increased pension saving a reality.
Next it was George Osborne with the first Budget of the Coalition Government on 22nd June, which included a number of announcements on pensions:
- Pensions Indexation. From April 2011, the Consumer Prices Index (CPI) will be used for the indexation of all benefits, tax credits and public service pensions.
- State Pensions and Benefits. From April 2011, the basic State Pension will be uprated by the higher of earnings, prices or 2.5 per cent. CPI will be used as the measure of prices but the basic State Pension will be uprated by the equivalent of RPI in April 2011.
- State Pension Age. The Government will review the date at which the State Pension Age rises to 66.
- Pensions Tax Relief. The Government will restrict pensions tax relief through an approach involving reform of existing allowances, principally of a significantly reduced annual allowance in the range of £30,000 to £45,000.
- Public Service Pensions. An independent commission chaired by John Hutton, formerly Secretary of State for Work and Pensions, will undertake a fundamental structural review of public service pension provision by Budget 2011.
- Default Retirement Age. The Government will consult shortly on how it will quickly phase out the Default Retirement Age from April 2011.
Two days later, reviews were announced into the timing of the State Pension Age rise to 66 and how best to implement auto-enrolment.
We all caught our breath for a few months and then, in October, the Government announced that, from April 2011, the annual allowance for tax privileged pension saving will be £50,000 and from April 2012 the lifetime allowance will be £1.5million.
Soon after, the outcome of the independent review into auto-enrolment was published and, separately, the Government announced that the State Pension age would rise from 65 to 66 between December 2018 and April 2020 for both men and women.
The Pensions Regulator flexes its muscles
Bill Galvin became the new chief executive of tPR from 17 May, replacing Tony Hobman, after five years in charge.
Soon after, guidance was issued on record keeping, monitoring employer support, multi-employer schemes and winding-up. Consultations were launched on transfer incentives and single equality schemes.
From June to September tPR used its powers of enforcement, handing out the first Contribution Notice to the Bonas Group Pension Scheme and a Financial Support Direction to companies connected with the Nortel Group and Lehman Brothers Group.
After four years of operating the Trustee Register, tPR changed the way it assesses the conditions for registration. From 51 firms at the start of the year, it is expected that this number will be considerably less by the year-end.
and the PPF was busy too
January and November saw the PPF unveil not one but two Purple books as a revamp took place and those schemes currently in the assessment period were removed.
June was the month the PPF issued new guidance to actuaries completing section 143 valuations and in October a new formula was proposed for calculating the pension protection levy from 2012/13 onwards.
Finally, as the year approached its end, the first scheme (the Paterson Printing Pension Scheme) successfully transferred through the new Assess & Pay Programme, just under 18 months after the company went insolvent.
How 2010 is shaping up – end of year financials
As we write, the pound is up 4.5% in the year against the Euro and down 3.5% against the dollar, the FTSE 100 sits around the 5750 mark, up 6% on the year, and the benchmark government bond yield has hardly moved compared to a year ago. Wouldn’t it be great if these relatively moderate movements were the result of a number of small predictable steps in one direction throughout the year and we knew what was going to happen next year? If only it was that easy when we agreed our recovery plans.
No doubt many of us will end the year by looking to the future. Will 2011 be the year that EU regulation imposes further funding requirements on defined benefit schemes? How will the rpi/cpi debate play out? Will new rules allow early access to 25% of our pensions savings if we fall ill? How about an ETV mis-selling scandal? Like 2010, a lot could happen. Please let us know what your predictions and concerns might be.
But before you become too paralysed with fear about potential hyper-inflation, the break-up of the European Union, winning the Ashes or never hosting the World Cup, you may wish to consider the words of Mark Twain: “I’ve been through some terrible things in my life, some of which actually happened”.
With Seasonal Best Wishes,
Brian Spence and the team at Spence & Partners
Apparently the Baiji (Yangtze River Dolphin) is amongst the rarest mammals in the world. It may even be extinct. Clearly there’s a fine line between being very, very rare (i.e. only one left) or being extinct (none left). The last definitive sighting was in 2004. It was declared functionally extinct in 2006 but video footage of what might have been a Baiji was taken in 2007 raising the possibility that there was at least one survivor out there, wisely staying well clear of humans.
When it comes to pensions legislation common sense is nearly as uncommon, but we appear to have a confirmed sighting in the DWP’s response to the consultation on the abolition of contracting out on a defined contribution basis.
Now I have never understood why one of Margaret Thatcher’s most lauded sound bites was “You turn if you want to. The lady’s not for turning!” Not turning in the face of irrefutable danger or logic is not a particularly common sense position to adopt. Indeed history and experience teach us that a U turn is not necessarily a wrong turn.
If only the Titanic had been able to perform a timely U turn. Or Thelma. Or Louise.
So clearly I welcome the Government’s common sense U turn on the abolition of transfers from contracted out pension schemes. I had blogged previously about the iniquities of the original provision, sneakily hidden in the regulations regarding the abolition of DC Contracting-out, which could have outlawed such transfers. Respondents to the DWP’s consultation on these Regulations presented a factual and rational analysis as to why, for some people, based on their particular circumstances, transferring out of a contracted out defined benefit scheme is clearly in their interests. A lesson that the Pensions Regulator could usefully learn. More importantly the DWP appears to accept that the decision about whether or not to transfer should be made by the member, having taken impartial advice, rather than be imposed in some crass one size fits all, we know what’s best for you, diktat from the nanny state.
As I previously noted the draft regulations did rather smack of an admission that the FSA was failing in its duty to regulate this particular area of advice. Rather than address that shortcoming they have tried to foist the responsibility for regulation of transfers onto pension scheme trustees through the Pension Regulator’s “guidance” framework. Some commentators had responded to this development by suggesting that it was wrong and possibly illegal for trustees to fully embrace the Pensions Regulator’s guidance on enhanced transfer value exercises. Given this, abolition may have seemed like an easy option, despite its inherent unfairness.
Yes members need protection from unscrupulous advisers but that is why we have the FSA and, from 2013, the Consumer Protection and Markets Authority. It is certainly not why we have pension scheme trustees, who have a difficult enough job to do without being forced to do the regulators’ jobs for them.
We have consistently argued that properly structured and funded enhanced transfer value exercises are a legitimate approach for employers to engage with their scheme members with a view to managing their liabilities. They also provide members with an opportunity to properly review their retirement planning with a professional adviser.
So credit where credit’s due, well done to the DWP for changing its mind on this one. It will be interesting to see if the Pension Regulator’s finalised guidance on enhanced transfer exercises will also be leavened with common sense.
Now if the DWP could only be persuaded to approach the question of GMPs in the same manner as it has recently dealt with Protected Rights – that is, just make them disappear – then that would be further evidence that, after years of languishing in neglect, common sense is unexpectedly back in vogue at Westminster.
I was in attendance on Friday at the first presidential address to the newly formed Institute and Faculty of Actuaries.
Mr Bowie’s speech was upbeat and set out an exciting vision for the future direction of the Profession. He was right to talk up the skill set that an actuary has to offer the wider business community, and reinforced that these skills are uniquely combined with a desire to act in the public interest and perform the role of a “trusted advisor”.
Innovation is not necessarily something we actuaries are renowned for, but the address included some promising signs. Tales of actuaries branching out into other areas such as banking, risk management and even electricity pricing were intriguing and should be pursued with vigour by the Profession. Spence & Partners will also look at the new Chartered Enterprise Risk Actuary (CERA) qualification with interest and see what the attainment of these skills could bring to our business.
All good, positive stuff, but my concern is: Who’s listening?
My reason for being in London was, in part, to meet up with three financial/pensions journalists. Not one was aware that the presidential address was taking place that day, and at least one did not recall who the Profession’s president actually was. Not a good start!
Rarely do we hear from the Profession on matters of great public interest, such as the ongoing debates around the ageing population and public sector pensions or the much talked about “inflation switch” from RPI to CPI. This void is filled by bodies such as the Pensions Policy Institute or the Office for National Statistics or even one-man bands such as Ros Altmann or John Ralfe. I long for the day that the Profession has the confidence to make its voice heard on important issues and fully support initiatives to make this happen.
On Friday, like most events at the Profession, I still qualified as “the young man sitting at the back”. This is a fairly worrying indictment of the Profession’s lack of engagement with younger members once the exams have been completed.
From the outside, I have always felt that the Profession has had the manoeuvrability of an oil-tanker when it comes to adapting to a fast-changing business environment – council for this, committee for that, with no clear agenda or purpose. Like Mr Bowie, I hope the recent merger of the Faculty and Institute can be a catalyst for change.
To sum up Friday’s event, I am confident that his message in the address was the right one, but am concerned that it was being delivered to the wrong audience (or worse still, no audience at all).
Following the recommendations of the Pensions Commission in 2006, the previous Government proposed the introduction of the National Employment Savings Trust (NEST), to address the lack of pension provision for employees who do not have access to workplace pension schemes.
From the perspective of employers, a major issue surrounding NEST is the likely cost of implementing the scheme, especially the associated administrative costs. An independent review has been carried out into the proposals for NEST – Making Auto Enrolment Work, which seeks to address the question as to whether the cost to employers imposed by NEST is necessary and proportionate.
Prior to the review, the proposed structure for NEST had the following key features:
- Every business with at least one eligible employee must comply with the regulations.
- An eligible employee is one who earns enough to pay National Insurance contributions.
- All eligible employees must be enrolled immediately in the workplace pension scheme.
- Employees are to be enrolled automatically, without need for application forms
- Contributions are calculated from qualifying earnings (earnings in excess of the National Insurance Primary Threshold, currently £5,035 per annum, which include variable items such as overtime payments and bonuses).
- Will be introduced in stages, commencing with employees of large companies, commencing in October 2012.
- Minimum employer contributions commence at 1% of qualifying earnings from 2012 rising to 3% by 2017.
- Minimum employee contributions commence at 1% of qualifying earnings from 2012 rising to 5% by 2017.
After consultation with business and the pensions industry, the authors of the report made the following key recommendations (which the new Government has welcomed).
- Every business with at least one eligible employee must still comply with the regulations.
- Contribution levels and phasing of contributions remain unchanged.
- The earnings threshold at which an employee is automatically enrolled is increased to be equal to the personal allowance for income tax (currently £7,475 per annum). The threshold at which contributions are payable remains the National Insurance primary threshold.
- An optional waiting period of three months should be introduced before an eligible employee is automatically enrolled. However, employees may choose to opt in at any time, and the company would then need to pay contributions.
- The system by which employers can certify that their defined contribution schemes meet the required contribution levels should be simplified.
- Further de-regulation measures should be introduced to ease the administrative burden on employers.
- The current cap on contributions (£3,600 per annum) and ban on transfers in and out of NEST is to be reviewed in 2017.
The impact of the recommendations is to reduce the number of eligible employees by around 1 million, which will reduce the costs associated with NEST, especially for companies with a high proportion of low-paid workers. Further simplification and cost reduction is achieved by simplifying the certification process for businesses with current defined contribution schemes and by reducing the number of short-term employees who would be automatically enrolled. Clearly, the proposals surrounding NEST will continue to cause displeasure amongst small employers. There also continues to be a risk that contributions are levelled down in existing schemes to match the minimum requirements of NEST.
Employees may also choose to opt-out of their employer’s scheme. However, employers are not permitted to induce employees to opt out of pension schemes, and a company which did so would be fined from £1,000 to £5,000 (depending on the number of employees).
Please contact us for further information or visit the NEST website.
In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats!!
The Government has announced a huge cull of quangos in a move it says is aimed at improving accountability as well as meeting deficit reduction objectives. Whilst I don’t expect this particular cull to result in the establishment of quango farms in the home counties, it may well have equally unintended consequences as I doubt what could be very significant pensions implications have been properly considered. These implications may well threaten the future solvency of some organisations not directly mentioned, and only loosely connected, and dwarf any potential financial savings expected. Read more »
Whilst the Labour Government have gone through a succession of Pensions Ministers, a constant for many years for actuaries and pensions consultants has been the Shadow Pensions Minister Nigel Waterston.
I have heard Mr Waterston speak a couple of times this year at the Association of Consulting Actuaries conference and at an election briefing organised by the Pensions Policy Institute. He certainly knew his stuff and clearly had lots of pensions industry contacts and extensive knowledge.
He lost his seat in the election though despite the swing to the Conservatives. He was subject to criticism by fellow Conservatives for not appearing to enjoy mixing with the ordinary voter. Must be difficult to be a deep expert in a specialist field whilst retaining broader electoral appeal. I dare say he should pick up a non executive job or consultancy position or two in the industry if he wants to.
Meanwhile Liberal Democrat pensions spokesman Steve Webb was returned safely to Parliament. Talks of a coalition raise the novel possibility of having a Pensions Minister with experience and understanding of the subject. The Labour Government had this for a very short time in 1997/1998 with Frank Field but he had radical ideas and did not last long.
Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited. You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.