Simplification, protection and uncertainty
Last year was a year of consultation in the UK. As part of the government’s strategy to encourage retirement savings and restore confidence in pensions in the UK, both the Inland Revenue and the Department for Work & Pensions (DWP) are undertaking simplification reviews.
The Revenue published in the autumn a second consultation paper to their radical review of pensions, proposing a new tax regime centred on a lifetime allowance of £1.4m (E2.07m) on the value of tax-approved pension provision. The consultation ends this month, and implementation has been pushed back to 6 April 2005.
DWP’s consultation paper on non-taxation pensions matters was issued last summer. While providing a broad outline of the plans to reform occupational pensions, the paper is short on detail, leaving pension schemes in uncertainty. We discuss some of the new ideas.
Recently in the UK, we have witnessed a handful of cases where pension schemes have wound up and delivered benefits well below what most members were expecting. To many other countries, the potential to not receive all of your promised benefits seems incredible. But many of those countries do not index pensions – is it better to receive part of an indexed pension or all of a fixed pension?
In a hasty response to the cases, the government made clear to employers: “The benefits you promise must be delivered to the best of your ability; if you decide to walk away from your scheme, you must meet the cost of providing the benefits in full”. This cost is to be the full cost of securing benefits with an insurance company – not a decision to be taken lightly.
The government also announced that a protection fund would be introduced to deliver 90% of the benefits to members where the employer has gone bust. Nice idea, but without any government backing, the cost will need to be met in full by employers or the protection fund could find itself in financial difficulty – just as has been widely reported recently regarding the US equivalent.
The existing cap of 5% on the requirement to increase pensions in payment in line with price inflation is to be reduced to 2.5% for future benefit accruals.
Finally, age discrimination will be outlawed by October 2006 in accordance with the EU Discrimination Directive and is likely to impact on pension provision.
Although increased protection for members’ benefits is welcome, the proposals raise serious issues for the future of UK defined benefit (DB) schemes. Without government backing, increased member security will come at a high price for employers.
As liabilities on winding-up become more onerous, credit ratings for many companies with large DB schemes may come under review. And with international accounting standards coming in from 2005, the proposals for increased member security could lead to more prudent assessments of pension promises within companies’ financial statements. At the moment, schemes are left in limbo whilst we await details of the proposals. Let’s hope 2004 delivers some clarity.
Christine Whatley is a partner working within the international team at Lane Clark & Peacock LLP, a UK-based actuarial consultancy providing international benefit advice to a wide range of multinational clients.
LCP is the UK member firm of the Multinational Group of Actuaries and Consultants, located at www.mgac.org LCP is part of the Alexander Forbes. The views expressed in this article are those of the author and not necessarily those of LCP as a firm nor of MGAC.