Employee Benefits | UK State Pension | Kay Review Update

02 November 2014

Week ending 2 Nov: Key review update|UK State pension among ‘least generous’|IEA calls for abolition of State pension

Kay review update

An implementation progress report on the Kay review of UK equity markets and long-term decision making has been published at: https://www.gov.uk/government/publications/kay-review-of-uk-equity-markets-and-long-term-decision-making-implementation-progress-report.

The report sets out the progress made by the government, regulatory authorities and market participants, and includes the government’s response to the Law Commission’s review of the fiduciary duties of investment intermediaries.   

UK State pension among ‘least generous’

Europe is going grey, with the percentage of over 65’s projected to almost double by 2060. The International Longevity Centre-UK's (ILC-UK) new EU factpack, Europe’s Ageing Demography, supported by the specialist insurer Partnership, examines the pattern of ageing across Europe, and sets the UK experience in to an international context.

This accessible factpack of statistics reveals the areas in which the UK enjoys relative success, and the points where it falls short.  It shows that while the UK has the lowest proportion of over 65s living in cold housing during winter, UK pensioners are at greater risk of poverty in retirement than their counterparts in Germany, France, Spain, and Romania.

If you use gross replacement rate (i.e. how much of the typical income the state pension replaces) as a measure, you will find that while those in Greece receive almost 100% of their pre-retirement income and the EU average is around half, those in the UK only receive around a third.

IEA calls for abolition of State pension

In its new report – Defusing the Debt Time Bomb – which is concerned with cutting public spending, the IEA calls for fundamental reform of pension and healthcare provision.

Proposals include replacing the state pension with a compulsory, private defined-contribution pension arrangements – which have succeeded in Australia. Compulsory healthcare insurance system would also benefit future generations. Unfortunately, little can be done about the current debt, which has already been incurred as a result of commitments already made.
According to the report, government spending needs to fall by 25% to keep debts under control, due to pressures from the ageing population in the UK.

‘Challenges in the new world of pensions’

ILC-UK, supported by the specialist insurance company, Partnership Assurance Group plc, has begun to undertake a series of events to explore the relationship between our changing demography and public policy. As part of the Population Patterns series, this brief explores the challenges posed by recent pension reforms.

The Government has instigated a once in a lifetime shake-up of pensions that has introduced flexibility in the defined contribution (DC) arena and opened up income options for retirees by allowing access to more of their savings through changes to flexible drawdown and trivial commutation rules. The state pension has also been overhauled with the introduction of a flat rate state pension of £144-a-week from April 2016 (to those who are eligible).

While the reforms have been broadly welcomed they are not a panacea to the problems created by the UK’s ageing population and in fact present new challenges. This brief addresses a number of issues including:

  • People’s underestimation of their longevity
  • Under saving
  • The possibility that people may leave their pension funds as cash savings
  • The need for people to work longer

Savers yet to decide what they will do with DC pots

The latest Briefing Note from the Pensions Policy Institute provides an overview of the findings from research, conducted on behalf of Alliance Bernstein by Opinium research, with over 1,000 individuals aged 40 and over who are actively saving into Defined Contribution (DC) pension schemes.

The research finds that individuals’ intentions around their DC pensions are characterised by high levels of uncertainty around two important factors that will have implications for the management of their pension savings in the run up to, and into, retirement:

• uncertainty around when they might retire, with 54% indicating that they might know vaguely, within a few years on either side, when they will retire, while 23% say they have no idea;
• uncertainty around how they will access their pension savings - at the time of survey, only 22% of respondents thought they knew how they would use their pension pot.

In addition the vast majority (87%) of respondents indicated that it was important to have flexibility around how they use their pensions funds.

ONS Pension Trends, Chapter 7: Pension scheme membership, 2014 edition

  • Membership of occupational pension schemes increased from 6.2 million in 1953 to 12.2 million in 1967, followed by an almost continuous decline between 1967 and 2012 to 7.8 million. Membership rose to 8.3 million in 2013.
  • For men and women aged 16 to 64, from 1996/97 to 2012/13, private pension scheme membership was higher for men in all years. The gap is decreasing, from nearly 20 percentage points in 1996/97 to 3 percentage points in 2012/13.
  • In 1997, 46% of employees had a defined benefit pension. By 2013, this had declined to 29%. Over the same period, membership of Group Personal Pensions and Stakeholder pensions increased from 1% to 12%.
  • Employee membership of a workplace pension is lowest at the beginning of working life. For employees aged 16 to 21, around 10% of both men and women belonged to their employer’s pension scheme.           
  • In 2013, for both men and women, those working in public administration, defence and social security were most likely (over 90% for both) to be members of a workplace pension. Accommodation and food services was the industry where both men (16%) and women (14%) were least likely to be members.                                            

Charges in workplace personal pensions: FCA consultation

The FCA has published a consultation paper containing proposed new rules for a charge cap for default funds used for automatic enrolment in workplace pension schemes. The paper also outlines rules for banning certain charging practices.

The deadline for responses is 31 December 2014 and the paper can be downloaded at - 

TPR/PPF Purple Book 2014

The ninth edition of the Purple Book was published on 30 October.

The latest analysis of the ‘DB universe’ shows that DB schemes and employers continue to reduce risk although some of the de-risking trends paused in 2014. And while risks fell in the year to 31 March 2014, scheme funding has deteriorated sharply since then.

The Purple Book gives the most comprehensive picture of the risks facing DB schemes in the UK. Key findings are -

Scheme demographics

  • The percentage of schemes that closed to future accrual rose again in 2014 – from 30 per cent in 2013 to 32 per cent in 2014. This is a continuation of the trend that has been in place since the start of the Purple Book in 2006.
  • The percentage of schemes that are open, edged lower to 13 per cent in 2014 from 14 per cent in both 2013 and 2012.
  • The number of active memberships fell by 6.5 per cent in 2014, to 1.8 million. Active memberships have fallen by 50 per cent since 2006.
    Scheme funding
  • Scheme funding improved between end-March 2013 and end-March 2014 – from 84 per cent in 2013 to 97 per cent on a s179 basis, and from 61 per cent to 67 per cent on a full buy out basis – reflecting both the impact of higher gilt yields on liabilities and the impact of higher equity markets on assets.
  • However, since end-March 2014, scheme funding has deteriorated by around 8 percentage points, reflecting lower gilt yields.

Asset allocation

  • The changes in asset allocation were smaller than in earlier years.
  • The equity share in scheme assets fell only slightly in 2014, from 35.1 per cent to 35.0 per cent. It has been on a downward trend since 2006 when it stood at 61.1 per cent.
  • The gilts and fixed interest share fell from 44.8 per cent in 2013 to 44.1 per cent in 2014. It had been on an upward trend since 2006 when the share was 28.3 per cent.
  • Within equities, the share of UK equities fell for the sixth successive year, to 28.9 per cent while the overseas share rose to 62.4 per cent. The unquoted equities share also increased to 8.7 per cent.
  • Within gilts and fixed interest, the index-linked share rose from 40.9 per cent to 41.1 per cent, the fifth successive annual increase. The share in corporate fixed interest securities fell for the second successive year to 40.3 per cent. The share of government fixed interest edged higher to 18.6 per cent.
  • The hedge fund share rose to 5.8 per cent in 2014 from 5.2 per cent in 2013, having been on an upward trend since 2009.

Automatic Enrolment enforcement activity on the increase

Small and micro employers are being warned by The Pensions Regulator to check the date they must be ready to meet new workplace pensions duties and to prepare early. The warning is in the Regulator’s latest automatic enrolment compliance and enforcement bulletin, which also includes details of how many times the regulator has used its statutory powers and gives details of recent investigations.

The bulletin covers the period 1 July to 30 September 2014, which saw a significant rise in the number of employers needing to meet their duties as thousands of medium sized employers, (approx 150-250 workers), who staged in April 2014 reached their deadline to complete their declaration of compliance at the end of August. Headline findings are:

  • 163 Compliance Notices were issued during the period. These statutory notices give employers a deadline within which to take certain actions.
  • The first employers were fined for not meeting their duties. Three fixed penalty notices were issued.
  • Research into employer awareness and calls to the regulator’s contact centres have indicated that some small employers still do not realise the law applies to them.

The bulletin highlights some misconceptions which the regulator believes may have the potential to impact on compliance levels, including misunderstanding how and when employers can postpone the date that they must automatically enrol certain workers, and the fact that eligible workers cannot opt out before they are automatically enrolled.

FCA targets investment fraud

The Financial Conduct Authority (FCA) this month launched a major campaign aimed at those most at risk of investment fraud.
Investment and pension scams generally involve high-pressured selling and promote products which often don't exist, including land-banking schemes, carbon credits and rare earth metals.

The FCA now provide a tool to help people spot investment fraud and a warning list of firms that run scams or operate without authorisation (http://scamsmart.fca.org.uk/page/be-a-scamsmart-investor).