The UK government’s green paper on pensions reforms received bad press before it came to be released. Penned in as arriving in Autumn, it didn’t materialise until 17 December, by which time scepticism about it contents had begun to snowball – helped no less by the minister of work and pensions, Andrew Smith’s pre-paper warnings that well-needed reforms would “not be radical.”
Yet, when the paper finally manifested itself, many pension industry participants were forced to admit that its contents were not quite as disappointing as expected. Indeed, the majority of onlookers found something positive to extract from the lengthy document – albeit predominantly from the Inland Revenue’s accompanying proposals on pensions tax simplifications.
The accompanying paper proposed an abolition of the eight existing pensions tax rules, and their associated limited on annual contributions and benefits, which Smith admitted were “imposing unnecessary inflexibility, driving up costs, and discouraging people from saving”. In their place has been proposed a single lifetime limit of £1.4m (E2.1m), to be assessed only at the point of retirement.
The simplification of the tax system was welcomed by most UK pension market participants, including the NAPF, and the Pensions Management Institute (PMI), promoter of professionalism in pension scheme management and consultancy. “The tax review makes a number of radical proposals which will make it easier for firms to retain their pension schemes, and offers the genuine prospect of some employers being able to offer schemes where there currently are none,” says Christine Farnish, chief executive of the NAPF. “It opens up alternative scheme design giving employers greater freedom to design the scheme that is appropriate,” says the PMI. Colin Singer, partner at consultants Watson Wyatt, also praised the simplification of tax rules: “The proposals will not in themselves solve the pensions crisis, but this consultation proves that the Inland Revenue is serious in its commitment to helping do so.” For senior executives, however, the lifetime limit of £1.4m spells bad news. “Amounts in excess of the new lifetime limit for pensions savings will end up being taxed at a rate of 60%, compared with the present higher income tax rate of 40%,” explains Andrew Sweeney, head of executive pensions at Mercers.
The government also accepted Alan Pickering’s proposals of a new regulator for the occupational pension system, that would be both advisor and regulator and replace the existing Occupational Pensions Regulatory Authority (Opra). Fears had been expressed that the introduction of a new regulator would complicate the pensions industry further, but a regulator that would play a supportive role as well as an admonishing one has generally been accepted as sensible and positive. Even Opra itself welcomed the proposal, and its chair Harriet Maunsell says: “ We look forward to working with the Department of Work and Pensions and the pensions industry as we move towards the new kind of regulator proposed.”
The decision to leave the state retirement age at 65 years old, and instead allow and encourage employees to work longer received mixed reactions. The Association of Consulting Actuaries was one body that was disappointed that the government had not recommended a phased increase in state retirement age. Says ACA chairman, Gordon Pollock: “We fear the delay in doing this, the shorter the time any phasing is likely to be over when the decision is finally made.”
Public sector employees did not escape a raise in retirement age, however to the outrage of the public sector trade union, Unison. New public sector workers from 2006 face having their retirement age upped from 60 to 65. Unisec general secretary, Dave Prentis deemed the proposal “irrelevant”, as “most workers are kicked out even before they reach 60, because of ill-health, outsourcing and redundancy”.
The green paper was seen to fall down with regards to encouraging savings - perhaps one of the most important issues for a nation with an ageing population which is broadly unaware of the importance of putting aside for retirement.
Says Mary Francis, director general at the Association of British Insurers: “People are either not saving at all, or not saving enough for a comfortable retirement. That is a massive problem.” She added that the ABI would be calling on the government over the coming months to introduce measures that will actively encourage a greater level of saving. “These must include the introduction of financial incentives to help more employers contribute to the pension schemes of their employees.”
Although praising the tax simplifications, the UK industry tended to agree with Bill Morris, general secretary of the Transport and General Workers’ Union, that the government had “failed to grasp the depth of the crisis”.