November/December 2009 Pensions Briefer

Transcription

1 Technical Bulletin 604 November/December 2009 Pensions Briefer INTRODUCTION The period under review has seen so many significant developments in the world of pensions it is hard to know where to start and certainly, I won t be able to cover everything of significance in this Briefer. The Pensions Regulator (TPR) has been active, with a consultation paper on revised guidance on internal controls for schemes issued in early December and a sabre-rattling speech by the Chair, David Norgrove, at the National Association of Pension Funds (NAPF) Trustee Conference, on enhanced transfer values. From the Department for Work and Pensions (DWP) the Pre-Budget Report was taken as an opportunity to further stretch the timeframe for the introduction of auto-enrolment of small firms. This Report also introduced yet further changes to the tax relief regime for higher earners, casting more complication into the mix. The Personal Accounts Delivery Authority announced that the Great West/Canada Life consortium had withdrawn for the bidding for the Scheme Administration contract, while survey results from NAPF confirmed the continuing decline in occupational schemes in general, and defined benefit schemes in particular, in the private sector. Finally, the latest document from the Financial Services Authority (FSA) on its Retail Distribution Review (RDR) has implications for the way contract-based workplace pensions will be sold in future. THE PENSIONS REGULATOR The consultation on revised guidance on internal controls for schemes follows thematic work and case-based observations over recent months and years by TPR. Focussed specifically on smaller schemes, it sets out a framework for Trustees to recognise and address risks in relation to 7 specific areas. These are a lack of knowledge and understanding, conflicts of interest, ineffective relations with advisers, poor records, deterioration in the employer covenant, investment risk and ineffective retirement processes. Whilst TPR explicitly recognises that smaller schemes will have limited resources at their disposal, it also specifically states that we would expect smaller schemes to have formalised procedures for No responsibility can be accepted, by the author or TISA, for loss occasioned to any person acting or refraining from action as a result of material in this document. It is intended for circulation only within member firms and under no circumstances should it be circulated more widely in the industry or to the public without the express written permission of TISA. TISA, Dakota House, 25 Falcon Court, Preston Farm Business Park, STOCKTON-ON-TEES TS18 3TX technical queries: enquiries@tisa.uk.com web: administration: fax: Tax Incentivised Savings Association Limited. A Company Limited by Guarantee. Registered in England and Wales No:

2 managing risk. This in turn implies written procedures and regular review, formally documented. In fairness, the guidance is mostly common sense and generally helpful, but why, as a small business, would you get involved in all this when you could run a contract-based workplace pension arrangement without all this hoopla? It is little wonder that employers have been taking this route in droves of recent years or, in the case of most small employers, not getting involved in employee pensions at all. As employers have been seeking to de-risk or dismantle their existing Defined Benefit schemes, one route that has been considered is the offer of enhanced transfer values (ETVs) to some, or all, scheme members with a view to getting them into Defined Contribution arrangements instead. Sometimes, the offer may be accompanied by a non-pension cash offer from the sponsoring employer. There has been considerable debate in the pensions press about the advisability of ETVs and it is certainly true that there are clear and present dangers to schemes in their inappropriate use, the biggest being that, by offering ETVs to some, the remaining member benefits may be jeopardised through insufficient funding. David Norgrove s speech at the NAPF Conference put the face of the regulator firmly against ETVs, saying that trustees should start from the assumption that such transfers are not in members interests. This is in line with guidance from FSA to the effect that direct offer transfers from DB schemes (i.e. without advice) are unlikely ever to be compliant. However, I can envisage circumstances where it will be in the interest of all members that such an exercise should take place. For example, where one, or a handful, of members represent a disproportionate liability on the scheme where the bulk of deferred members are modest earners and the overall funding situation ignoring those large liabilities is adequate, an ETV may be appropriate and there are others. However, Trustees are clearly going to have to justify such an exercise very strongly and be seen to restrain employers who are playing fast and loose. DEPARTMENT FOR WORK AND PENSIONS PRE BUDGET REPORT The Pre Budget Report (PBR) was used as a platform to announce a number of changes to the auto-enrolment process from 2012, with the headline grabber being that the smallest employers would not have to start this process until Explicitly, this is to save money on the tax relief bill, but is also designed to derisk implementation, probably (for most of this market segment) into Personal

3 Accounts or its successor in title (see later). This has been greeted with howls of derision from some quarters, given that it means many employees will not be saving meaningful amounts until the end of the next decade, resulting in much poorer outcomes in retirement for many. This, of course, assumes that saving into a pension is the best option for modest earners in the first place and, as we have seen, the debate on this point is far from dead. DEFAULT RETIREMENT AGE Elsewhere, through the Department for Business, Innovation and Skills, the issue of the Default Retirement age is up for grabs, with many predicting the end of this historic point as more and more employees choose, or need to, carry on in work. Employer bodies are typically against such a move as it would remove a point at which an employee would be required to retire. There are also concerns about bed blocking, with jobs for younger workers getting into increasingly short supply as older workers carry on indefinitely. Certainly, employment rates for young people are currently a cause for concern, but this may reflect a wider structural issue for the UK labour market as the effects of the banking crisis and the recession unfold with possibly unique effects for this country. The consultation closes on 1 ST February 2010 with more at COLLECTIVE DEFINED CONTRIBUTION (CDC) SCHEMES RESEARCH PUBLISHED In the search for alternative structures which might form some kind of half way house between Defined Benefit schemes and Defined Contribution arrangements, the above approach has been suggested. In a nutshell, the CDC approach would pool employer contributions to a DC scheme, mitigating investment risk and providing some greater degree of certainty of outcome for the employee. Employer contributions would remain fixed and the arrangement would be governed by a Board of Trustees. Employees would continue to bear investment risk, although that risk would be somewhat mitigated by the pooled investment approach, giving less potential volatility of pension outcome between retirees. DWP commissioned a qualitative research report amongst employers to assess the attractiveness of this approach.

4 So, how attractive is it to employers? Not very is the short answer. The administrative and other costs were broadly seen as not justified in the light of, in reality, a very limited upside in terms of pension outcomes for employees. They would remain holding all the risks associated with a DC scheme, in reality, and the theme emerging from the qualitative work was that employees themselves have become disengaged from pension saving, and want as little as possible to do with it. This echoes the results of The Pensions Reports 2006 and 2007 with which I was involved. Employers are simply not going to provide, on a voluntary basis, a benefit their employees do not value. Shortly, as we know, these reluctant employers will be compelled to offer such a benefit... The report can be read at PERSONAL ACCOUNTS THE SCHEME ADMINISTRATION CONTRACT This is the biggest single outsourced contract being offered under personal accounts and has been the subject of a lengthy and detailed tender and competitive dialogue process, which still has 6 months to run before it is let. The withdrawal of the Great West/Canada Life consortium from the process in December leaves just Tata Consulting in the field. This must have come as an unwelcome Christmas present for the Personal Accounts Delivery Authority (PADA), who nonetheless put a brave face on things in announcing it. Presumably we now have a competitive monologue rather than a competitive dialogue. It is worth saying, however, that PADA under Tim Jones have built a reputation for excellence of consulting and engagement with their stakeholders that, in my view, is an example for other departments of state to look up to. The PADA team have made themselves widely available, have genuinely listened and are recognised as highly capable, as well as personally popular with the wider pensions community. We must wish them a good 2010, despite the herculean tasks before them. PERSONAL ACCOUNTS - NAME CHANGE Personal Accounts will not be the name that the scheme launches under from Their new name will be unveiled at a simple ceremony early in the New Year. We await developments with baited breath. Scurrilous rumours to the effect that a new name is needed because someone forgot to purchase the original web domains are, of course, false.

5 NAPF ANNUAL SURVEY RESULTS Earlier this month, yet more evidence of the decline in occupational pension provision was published by NAPF. The depressing statistics included just 23% of DB schemes in the private sector being open to new members, with 18% of this already small number expecting to move both new and existing members to DC. 31% of DB schemes already shut to new members expect to make this move. More at This continued decline in private sector DB schemes simply highlights even more the yawning gap with public sector pensions, where 80% of employees are in a DB scheme often unfunded. There is increasing consensus that this is unsustainable and that policy options for reform must be found. Accordingly, the Institute for Economic Affairs, together with the Institute of Directors and other interested bodies, has set up a Public Sector Pensions Commission and I am involved with it on your behalf. FSA RETAIL DISTRIBUTION REVIEW In a further, substantial, paper issued this month, FSA has signalled its intention to do away with commission based remuneration for the sale of contract-based workplace pensions such as Group Personal Pensions, Group Stakeholder Pensions and Group Self Invested Personal Pensions, introducing instead a system of Consultancy Charging otherwise known to you and me as fees. This will mean that employers seeking advice on how to establish such an arrangement will either have to pay a fee to their adviser or set about establishment without advice. It seems certain that non-advised propositions will emerge to help employers do this, probably around the development of new, on line, corporate wrap platforms which will enable employers, and employees, to manage benefits, and personal assets, in one place. Several of these are known to be under development, with the first expected to break cover in Interestingly, all will offer a form of ISA savings vehicle into which employee and employer contributions can be directed, despite the lack of the tax breaks associated with pension saving. PENSIONS TAX RELIEF FOR HIGHER EARNERS Yet more complexity was introduced in the PBR, adding to an already hugely complex set of proposals effective from 2011, supported by anti-forestalling measures. Effectively, without going into detail, the earning level at which these

6 new measures kick in has been reduced for most people from 150,000 to 130,000. The effects for individual pensions sales are starting to come through in the new business figures, with some providers privately describing the flow as having dried up. Others report better results, but the Association of British Insurers suggests the 3 rd quarter s figures were down 25% on a year ago. There are structural problems here; one adviser put it to me that clients don t want to pay tax twice saving into a pension for retirement guarantees they will do so, once in work and twice in retirement. We are advising on other vehicles now. As higher earners disengage from pension saving, they will influence their employees even further away from it. And, as we have seen earlier, they are already disengaged themselves. HAPPY NEW YEAR FOR 2010 On this rather downbeat note, I wish all current and future TISA members a happy and prosperous New Year! MALCOLM SMALL, DIRECTOR OF PORTFOLIO AND RETIREMENT PLANNING, TISA [Please note that the comments above are the personal views of the author and do not represent TISA policy]. Correspondence is welcome. Contact malcolm.small@tisa.uk.com 31 December 2009