Alan Pickering’s review, ‘A simpler way to better pensions’ published in July, formed part of a wider ranging drive to simplify the current legislation governing private pensions in the UK. Its remit was not only to simplify the system, but also to reduce the costs of meeting pensions requirements without compromising the security of members’ benefits.
The regulatory complexity surrounding UK occupational and personal pensions has been to a large extent a product of “benign intent” on the part of governments, says Peter Ford, head of pensions at Norton Rose and a member of the Pickering review team. The compulsion to legislate has produced unduly detailed prescription. Layered onto an already thick crust of existing legislation, the upshot has been acutely confused policy objectives.
Amongst Pickering’s principal recommendations therefore is the drastic reduction of pensions products and a focus on establishing a ‘proportionate regulatory environment’. Legislation, says the review, should include a statement of its aim, concentrate on aim rather than detail, not be overly prescriptive and be respectful of the matrix of existing law.
In support of these criteria, the report recommends the establishment of a new pensions act which would repeal or consolidate existing Department of Work and Pensions (DWP) private pensions legislation. Yet, irrespective of whether people’s pensions are provided through the workplace or the marketplace, a “pension is a pension is a pension” and schemes should be subject to the same strictures.
Pickering has urged that employers have more control and flexibility over their pension schemes, particularly in the area of scheme design. It recommends the re-introduction of compulsory company scheme membership, which employers would be allowed to make a condition of employment. With money purchase (defined contribution) schemes, the employer would give a minimum level of contribution (suggested at 4%), which would also extend to personal pension schemes. Significantly, Pickering also proposes that the employers obligation to provide index-linked pensions and survivors’ benefits should be scrapped (although could be provided on a voluntary basis).
For compulsory membership of occupational schemes to be viable, the review recommends full concurrency whereby members could contribute to an occupation and personal pension at the same time. Until such concurrency, Additional Voluntary Contribution (AVC) schemes should remain available to scheme members. Linked with compulsory membership is the suggestion of immediate vesting and easier transfers.
Members would be able to gain entitlement to a pensions provision when they join an occupational scheme rather than the two year vesting period which currently stands. This would only be appropriate if trustees were able to transfer small amounts of accrued pensions into ‘safe harbour’ products, probably a stakeholder pension, in order to avoid increased administrative costs.
Contracting-out requirements should also be made far less onerous. Pickering also proposes that Section 67 of the 1995 Pensions Act, which requires the maintaining of the value of accrued benefits when any amendments take place should be removed, replaced with a requirement that any amended benefits are expected to be equivalent in value. In occupational final salary schemes, the report recommends the optional removal of guaranteed minimum pensions (GMPs), to be replaced by a retrospective reference scheme equivalence test.
The review has also called for a completely new kind of regulator (NKR) to advise the Government on occupational regulatory matters. As Ford says of the current regulator, “even Opra accepts that Opra doesn’t work. It is a policeman, but in a massively box-ticking manner”. The NKR would be to the larger extent advisory rather than disciplinary.
Coupled with this, Pickering envisages minimum regulation. In keeping with avoiding detailed primary legislation, a small amount of legislation would be supplemented by non-statutory codes of practice and guidance, which the new regulator would monitor, assist and advise on.
Ford says it is important to recognise that although the codes of practice would probably not be mandatory, they would demand compliance. One area where the codes would operate is member-nominated trustee. This is currently prescribed by detailed information disclosure legislation. The report recommends the removal of the current opt-out clause whereby one-third of member-nominated trustees would be required.
Ahead of the Green Paper, the government’s response to the Pickering report as an indicator of what lies ahead is critical. Andrew Smith, secretary of state for Work and Pensions has acknowledged that the Pickering report “covers complex issues and includes some tough choices”.
The government’s proposals, re-iterated last week by Baroness Hollis, DWP minister in the House of Lords, are to match the following principles: fairness, security in retirement, informed choice for consumers, simple and proportionate regulation, ensuring incentives are effective and well understood, promoting employment amongst older workers and flexibility to give individuals more choice over the pace at which they retire from the labour market. “The arithmetic means that we must save more, or work longer or both”, says Hollis.
Yet the unknown hand in all of this is the shortly to be published Inland Revenue report which is looking not only at tax simplification, but meaningful tax incentives to encourage people to save for their retirement and induce employers to run good quality pension schemes. In view of this and other pensions-related works in progress, it is hard to see how Pickering will fit into the bigger picture and how many of its recommendations will be taken forward by the government.
Industry reactions to the report have thrown up a wide range of criticisms. Unions have seen the proposals as an attack on additional benefits and a general weakening of defined benefit schemes. However, UK company pension schemes appear to have welcomed the proposal, according to the results of a telephone survey in August carried by the National Association of Pension Funds (NAPF). Almost three quarters of respondents (72%) said the report’s proposal would lead to a simplification of the pensions framework.
The survey also suggests that fears that companies would cut additional benefits if given the opportunity are unfounded with 81% of respondents saying they would keep widows’ benefits, and 76% index linking, even if the requirement to do so were abolished.
“It seems to be an exercise in how to save defined benefit schemes rather than to help us solve the pension or retirement issue”, says Peter Dencik, director of Singer & Friedlander Investment Management. He believes the report to be far too skewed towards giving the employer control. The proposal to scrap survivors’ benefits is “absolutely shocking by itself”, says Dencik and “not reflective of the real world”. Furthermore, the recommendation to end index-linking of pensions, which has been widely condemned as an enticement to poverty in old age, is, to Dencik’s mind, another example of Pickering looking at the employer point of view rather than looking at the issue of how to create a second pillar in the UK which can solve some of the fundamental problems facing the pension system.
He also finds it surprising that Pickering, as chairman of the European Federation of Retirement Provision (EFRP), did not draw more examples from the industry-wide schemes that are run on the continent such as in Belgium, the Netherlands, Denmark, Sweden and some in Norway. The Pickering report only operates within the framework of company final salary schemes. Yet, company schemes may be hardly the best solution in a world where people only work for the same employer for a few years.