Following the market recovery, the UK has a new government eager to implement change and a pensions regulator keen to protect scheme members, finds Jonathan Williams
Over the past 12 months, pension funds in the UK have not only seen their assets recover due to an upturn in the equity market, but also a pensions regulator keen to protect scheme members and a new government churning out reform proposals.

However, a change likely to have the most significant impact was one announced soon after prime minister David Cameron's new coalition government came to power - the linking of private sector pensions to the consumer price index (CPI) rather than the retail price index (RPI). It is argued that CPI is a fairer measure of pensioners' actual needs, as it does not take into account mortgage increases. However, implementing the changes does pose some problems as many scheme rules specify the use of RPI for annual pension increases.

 

Additionally, it is unclear how investors go about best matching their liabilities to their investments, as the Debt Management Office is yet to announce any details of a bond linked to CPI, with many experts believing any such issuance to be 18 months away.

Despite the confusion surrounding the switchover at the time of writing, the National Association of Pension Fund (NAPF) chairman greeted the news warmly when it was announced by the new pensions minister, Steve Webb. "This gives final salary pensions some breathing space, and it will make it a little easier for firms to keep schemes open," said NAPF CEO Joanne Segars at the time, noting that the change would reduce funding deficits facing many defined benefit schemes. Figures put out by KPMG in July estimated it would cut £45bn out of £1,000bn in private sector liabilities.

The Conservative-Liberal Democrat coalition government further made good on the Conservative election promise to re-introduce index linking to the basic state pension. From April next year a triple lock will be in place, meaning state pensions will rise with earnings, prices or by 2.5% - whichever is highest.

Laws dictating a mandatory retirement age of 65, allowing workers to be dismissed, are also being examined; as is the possibility of the state retirement age being increased to 66 sooner than its current 2026 deadline.

The new coalition government has also appointed former Labour work and pensions secretary John Hutton to chair a commission examining the viability of public sector pensions. A first draft of his report, examining the viability of the current system, was expected this September, with the final report due before next year's budget.

Cameron also seems likely to support auto-enrolment, with Webb adopting a positive attitude to the system. While a separate review is examining the pros and cons, Webb stressed at a recent Association of British Insurers speech that any review was merely a formality to guarantee any framework implemented several years ago was still applicable in today's world.

Speaking in late July, Webb elaborated: "We need a policy that strikes the right balance between giving people the chance to save in a workplace pension whilst minimising burdens on employers and the Exchequer."

This summer also saw the winding up of the Personal Accounts Delivery Authority (PADA), meaning the NEST Corporation officially took charge of the incoming National Employment Savings Trust (NEST).

Another expected change is the lowering of the annual allowance for pension payments. The threshold for taxing pension savings is expected to be lowered to as little as £30,000 later this year. The changes would mean any contributions over the threshold would be taxed at 40% or higher when paid into a pension pot and taxed again upon retirement. However, exact details of the new regime have not been revealed despite plans to implement the new system by the next tax year.

A survey by Hewitt found that an overwhelming majority of employers were in favour of postponing the new tax scheme for another year, as there was still significant uncertainty about the new measures and how companies should best adapt.

In late June it was revealed that The Pensions Regulator (TPR) issued its first ever contribution notice to Belgium's Michel Van De Wiele Group, ordering it to pay £5m (€6.2m) into the Bonas Group Pension scheme. The company was criticised for retaining the Bonas business, but placing it into a pre-pack insolvency. Further, Michel Van De Wiele did not engage "openly with pension trustees or the regulator". At the time, Bill Galvin, TPR's acting chief executive, said the step was necessary to protect both members and the Pension Protection Fund.

"I guess we've seen the regulator flexing its muscles a little a bit over the past year," says Deborah Cooper, Mercer's head of retirement research. "The regulator's direction of travel has clearly been towards an increasing level of security for scheme members. I think what's more concerning is some of the messages that sometimes the regulator comes out with that don't actually have legislative weight behind them but is sometimes more a judgement." Cooper adds that some statements look like "an interpretation of legislation the regulator is making".

She adds that the current climate of contribution notices and financial support directions (FSD) by TPR was a positive thing for many members, but made employers uneasy. "In respect of past accrual for certain categories of scheme members it works in their interest, but what it does is create a sort of fortress mentality. So what you've got is secure, but you'll be becoming increasingly less likely to get more [from a scheme]."

Further, the past year has seen the regulator pursue Nortel Group for £2.1bn in funding for its UK pension scheme. Nortel Networks UK, the scheme's sponsor, went into administration in January 2009, at the same time as several other entities worldwide started bankruptcy proceedings.

TPR reasoned it had a legitimate case to ask 25 companies, all part of the overall group, to contribute to the funding shortfall, partly because they had benefited from research and development work conducted by the UK subsidiary, while also allowing the deficit to expand by paying "little or no contributions".