Week ending 7 June: Call for independent pensions body| DC return updated| Who will care for Generation Y?|
Call for independent pensions body
A number of key figures from the pensions industry have written an open letter to the new Pensions Minister, Ros Altmann and Financial Secretary to the Treasury, David Gauke calling on them to establish an independent retirement savings body. This follows on from calls before the general election for the new government to set up an independent pensions commission.
The letter's authors contend that a new body is needed to take a “holistic approach”, to “take a step back and assess the path we are on, and the subsequent impact on long-term saving in this [pensions] environment” and to “help solve the current problems of short-term decision-making and consumer mistrust in financial institutions”.
It is recommended that the body should be purely advisory, but could still help government “validate any difficult decisions relating to retirement or long-term saving”.
Signatories to the letter include BESTrustees chairman, Alan Pickering, NAPF head of policy and research, Jackie Wells, ACA chairman, David Fairs and former Office for National Statistics national statistician and chief executive, Dame Karen Dunnell.
Disabilities Minister named as government’s pension spokesman in Commons
The DWP has confirmed that Minister for Disabled People, Justin Tomlinson, will answer questions and lead debates in the House of Commons on pensions. Decision-making responsibilities will rest with newly-appointed Pensions Minister Ros Altmann.
It has also been announced that Labour peer Lord Bradley will speak for the opposition on pensions in the House of Lords.
DC return updated
The Pensions Regulator has added new questions to its scheme return form in respect of defined contribution (DC) occupational pension schemes. The new questions for 2015 are:
- Question 9 on the charge cap which came into effect on 6 April 2015, asking affected schemes to confirm they comply with the requirements.
- Questions 10.2 and 10.8 on the new requirement for a chair of trustees, asking schemes to confirm if they are exempt from the requirement to appoint a chair of trustees and, if not, give the name of their chair.
Also, questions 19.2 and 19.3 have been amended. Schemes are now asked to confirm whether their employer has auto-enrolled any staff in the scheme since 6 April 2015 or used the scheme to meet the new employer duties for existing staff since that date.
Small firms yet to think about auto-enrolment
From 1 June 2015, more than 1.2 million employers with fewer than 30 staff will have to begin complying with the new workplace pensions legislation, with over 500,000 having to comply by the end of next year. However, according to new research by NOW: Pensions 27% of all businesses who are yet to stage haven’t given any thought to how they’ll find a provider.
While this is an improvement on 2014, when 44% of SMEs surveyed said they hadn’t thought about it, it still means that almost 350,000 businesses are unprepared.
Who will care for Generation Y?
A new paper from the Centre for Policy Studies, written by Michael Johnson, looks at the plight of Generation Y (those born after 1980), which could be the first generation to experience a quality of life below that of their (baby boomer) parents. According to the paper, the latter have become masters at perpetrating inter-generational injustice, by making vast unfunded promises to themselves, notably in respect of pensions.
Indeed, says Johnson, such is their scale that if the UK were accounted for as a public company, it would be bust. In any event, Generation Y will have to foot the bill.
To evaluate the scale of the problem, the Treasury’s Whole of Government Accounts (WGA) are considered. By including many of the nation’s unfunded promises, they are closer to company accounting than the National Accounts; consequently, they are more useful for assessing the long-term sustainability of our public finances.
The gap between the nation’s assets and liabilities grew by an unsustainable 51% in the five years to end-March 2014, to £1,852 billion. At 111% of GDP, this is equivalent to £70,000 per household, and is £450 billion more than the National Accounts’ nearest equivalent, the public sector net debt. The WGA, however, excludes the State Pension, the largest of all unfunded liabilities (roughly £4,000 billion). Include it, and the burden per household rises to £221,000.
Reining back on unfunded promises means either stop making them, or fund them now, which would require higher taxation (or additional cuts in public spending). Pre-election pledges have limited the scope for raising rates of taxation, leaving the Chancellor with little choice but to cut tax reliefs and exemptions.
This paper focuses on the £110 billion of expenditure reliefs, defended by special interest lobbyists; and also discusses the recent Public Accounts Committee’s excoriating report into HMRC’s general management of reliefs and exemptions.
There are six specific proposals. Their expressed purpose is to improve transparency and put a brake on deferring costs, i.e. to arrest the accumulation of unfunded commitments that Generation Y, in particular, will otherwise have to meet. This paper does not contemplate the fate of Generation Z.
EIOPA: Financial Stability Report 2015
The latest Financial Stability Report from the European Insurance and Occupational Pensions Authority (EIOPA) includes commentary on a number of DB and DC pension scheme issues.
The ongoing macroeconomic environment generating increasing challenges to the European occupational pension fund sector. Interest rates, which declined even more in the course of 2014 kept the pressure on pension fund liabilities. Traditional Defined Benefit plans (DB), 75% of the sector in 2014 in terms of assets, with guaranteed pensions based on a predefined formula, are directly adversely affected by those developments.
In respect of DC plans, a material drop in plan members' future benefits driven by lower long-term expected returns could have systemic implications to the real economy since it might involve significantly lower pension benefits than expected for a significant part of the population with a potentially direct negative impact on aggregate demand in the future. Significantly lower pension benefits, than expected, could have a negative impact on the aggregate demand for pension savings in the future with members choosing alternative forms of retirement provision. Members may choose to pay higher contributions over the accumulation phase or work longer to maintain their living standards and expect pension benefits.
New types of hybrid (HY) schemes have emerged to deal with the current challenging macroeconomic environment. Despite a clear trend towards DC schemes in many countries, DB schemes still represent the largest part of the sector. In order to increase available options, in some countries new types of HY schemes have emerged. HY schemes combine elements of both DB and DC types but currently represent just 1% (in terms of assets) of the EU pension market. However, it should be noted that in a few countries, the DB type of scheme could include many types of schemes where risks can be shared by employers, members and beneficiaries.
During 2014 many regulatory changes took place in the European occupational fund market. The UK 2014 Budget abolished the effective requirement to buy an annuity with DC pensions' pots. From April 2015, the tax rules were simplified to give people unrestricted access to their pension savings from age 55. Drawdown of pension income under the new, more flexible arrangements will be taxed at marginal income tax rates rather than the current rate of 55% for full withdrawals. The tax-free lump sum will continue to be available. Individuals will have access to free and impartial guidance, to help them make the choices that best suit their needs in retirement. This is likely to have a negative impact on demand for individual lifetime annuities but may increase demand for other retirement products.