The deregulatory review of pension legislation is one of the most important parts of the white paper, claims David Willetts MP.
Speaking at the National Association of Pension Funds (NAPF) Annual Conference, Willetts, a senior adviser to Punter Southall and the Conservative Shadow Secretary for Education and Skills, says it is one area of the paper which seems to have moved beyond Lord Turner’s original report.
He says there was a missed opportunity in the Pensions Commission’s report for an implicit deal to keep employers funding pension schemes in return for help with the legacy costs and regulatory burden.
Willetts welcomes the proposals for a deregulatory review and the assurances from the government it is serious about the issue as he points out “if we don’t do something there will be big problems for big businesses and no-one will be willing to provide a funded scheme anymore”.
He suggests the review will be helpful as at the moment, according to the second Turner report, around 3.7% of GDP is going into pension saving for the future, but he warns following the reforms to the state system and the introduction of a National Pension Savings Scheme (Npss), there will still only be 3.7% of GDP going into funding pensions.
This means all the reforms will have managed to do will be to keep the percentage of GDP constant, and as a result there is a real risk of people being traded down into inferior schemes. Therefore he points out anything which can be done to make things more affordable for employers, such as a review of pensions regulation, should be welcomed.
But Willetts also points out some of the ideas the government is looking into during the review such as the mandatory indexation of mandatory indexation of pensions in payment and restrictions on changes to accrued rights, also called a section 67, were actually first put forward by the Pickering report in 2002.
He says: “These ideas have been around for a while, so we can hope almost five years after Pickering was published, the ideas are now being put back on the table.”
The former Conservative Shadow Secretary for Work and Pensions says the deregulatory review should particularly look at scheme pension ages and surplus refunds to employers.
He points out it would be extraordinary if the state could raise its pension age to reduce costs, but employers can’t do the same thing, meanwhile he suggests companies would be more willing to invest money into pension schemes if they knew they could also take it out again if the fund goes into surplus.
But Willetts says: “The next step is to now see if we can use this deregulatory review to see how risks can be shared between employers and the individual and to be able to find way for defined benefit (DB) schemes to continue going forward.”
Meanwhile also speaking at the conference, Christine Farnish, chief executive of NAPF, agrees funded pension liabilities of around a trillion pounds are a major economic issue and pose a policy challenge for the government.
She says: “Many DB schemes are now up to 70% more expensive o provide than was anticipated when they were first set up, because of a combination of regulatory requirements such as compulsory indexation, and the fact scheme members are living longer but scheme retirement age hasn’t changed.”
As a result Farnish says the government needs to look again at the regulatory framework for such schemes and bring an element of flexibility back into the system, so schemes can adapt to economic and demographic changes.
She warns if nothing is done to unwind some of the additional requirements imposed on schemes over the years, the industry faces an increasingly unstable situation which increases the risk of employers levelling down at the first opportunity to the minimum of a Npss.
To combat this some possible solutions put forward by Farnish and the NAPF include:
- contract renegotiation to find a new more affordable settlement,
- system of cost sharing of the total remuneration
- change to the regulatory framework
- permit restructuring including a discontinuance fund
- stopping indexation of pensions in payment
- increase in scheme retirement age
She says there are some real opportunities to sustain this deal going forward without some new crisis appearing in 10 to 15 years time, and reforms in some of these areas could have the scope to make a significant difference to the costs of running an occupational pension scheme.
Farnish adds: “Government cannot avoid this issue indefinitely and must take steps to tackle it head on. We therefore welcome the commitment to review the regulatory burden on existing schemes, and look forward to working with government to achieve a successful outcome.”
However the Trades Union Congress (TUC) have hit out at the NAPF for suggesting what it calls a series of ‘smash and grab’ raids on people’s pensions by allowing employers to cut benefits build up by employees in pension funds.
Brendan Barber, general secretary of the TUC, says this call for employers to make smash and grab raids on their staff’s pension benefits is completely unacceptable, adding it is no more than a retrospective pay cut, cutting wages which have already been paid, and warns the union will fight this “tooth and nail, both politically and in the courts”.
He adds: “If this were allowed, there would be an inevitable chain reaction with every employer facing city pressure to break the pensions promise to staff. It is odd to see the leader of what is meant to be a pro-pension body putting forward a proposal of collective self-harm.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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