Making pensions popular
Simplification was the topic firmly on the agenda at the National Association of Pension Funds (NAPF) annual conference in Brighton. “The pendulum has swung too far in favour of regulation and complexity”, Alistair Darling, Secretary of State for Work and Pensions told the conference. Hardly a day goes by without pensions making headline news, yet their popularity has been undermined by over-regulation. It was his intention to make pensions “genuinely popular”. The majority of people found pensions and the vast range of products on offer confusing; a main disincentive to saving as they were not sure what they were getting. Darling compared this to the fact that more than 12m people have saved over £78bn in ISAs since their launch in April 1999. ISAs offered a “simple prospect” of “save money, save tax”. Lessons could be drawn. Darling envisioned a range of “straightforward” pensions products with a “simple health warning”, aimed at the mass market which could be bought and sold over the phone or by internet.
With respect to regulatory simplification, the government is waiting for the results of three separate reports it commissioned last year. Alan Pickering, chairman of the European Federation of Retirement Provision (EFRP) is reviewing ways of simplifying pensions regulation. With the intention, said Darling of “stripping away some of the unnecessary regulation and making it easier for companies to run schemes and for individuals to save for their retirement”. Ron Sandler, chief operating officer of Natwest Bank is looking at competition across the retail investment and the inland revenue is considering whether it is possible to simplify the taxation of occupational pensions. With the results shortly to be published, the government intends to bring out its own proposals in the autumn.
On the subject of the new accounting standard FRS17, “no-one can argue against greater transparency”, said Darling. He believed that the standard, although provoking a number of decisions, was not the “root cause” of the difficulties faced. He acknowledged however that accounting for pensions assets and liabilities on the balance sheet only provided a “snapshot at one point in time”. As such investment decisions should not be made on a “mere snapshot”. For defined benefit schemes (DB), Darling said that it was companies rather than FRS17 which were shutting down DB schemes.
Darling said of the biggest problems was getting people to work until the current state retirement age of 65. This had substantially increased the problems now faced. Many who had come out of the labour force could frankly ill-afford to do so. The government needed to not only encourage the over 50s to stay in work, but do everything it could to get people to save.
As far as pensions and saving was concerned said Peter Thompson, Chairman of the NAPF, April’s budget was “another missed opportunity”. Moreover, “even if the government is not concerned about the move from defined benefit to defined contribution, it really should be concerned about the overall reduction in the level of saving for retirement”. The issue of increasing life expectancy and the importance of the government’s role in encouraging saving for retirement could not be overstated. It came down to whether or not employers believed whether the government actually cared whether they provide pensions for their employees. As he continued, “tax changes; the introduction of contract-based products such as stakeholder pensions which are not employer-specific and may be easier for government to control; and inaccurate statements about how the world of work is changing; all these lead to a scenario where employers can be forgiven for taking a view that the government is at best neutral about whether they make pension provision for their employees”. On the matter of regulation, the most common concern among NAPF members was undoubtedly the need for “serious simplification”, said Thompson.
Alan Pickering of consultants Watson Wyatt, who is heading up the Department for Work and Pensions simplification review felt it would serve no purpose to blame anyone for the complicated system. One area the review is looking at is the system of contracting out of the state second pension, which has been viewed by many as the “bête noir” of the pensions system. As Pickering told the conference he would be looking at “contracting out in particular – simplifying it retrospectively and the extent to which it should remain a feature of our landscape”. His recommendations to shake up the whole private pension system will, he confirmed, see the number of pension scheme types falling.