Pensions World

Lindsay Tomlinson, in his first column as NAPF chairman, speculates on what the future might hold for pensions provision

The next couple of years are going to be absolutely crucial for the way in which pension provision develops in the UK. The current pensions model is clearly unsustainable. After the general election, the incoming government will take decisions, consciously or unconsciously, which will shape the pensions landscape for future generations.

I see four broad strands of policy making, namely Personal Accounts, defined benefit (DB) provision, public sector pensions and general capital market regulation arising from the financial crisis.

• Personal Accounts

Looking at Personal Accounts and defined contribution (DC) pensions, there does seem to be broad political consensus that these represent the way forward. Despite the political procrastination around Personal Accounts, workplace pension provision for future generations is highly likely to be in DC form. Time will tell whether Adair Turner’s plans for centralised provision are eventually implemented and are effective. At the moment fears of levelling down and of planning blight seem justified.

• DB provision

We have the massive issue of our DB pension schemes. It would appear that, whatever is done now, DB schemes have a finite lifespan. It is likely that we will continue to see further closures to new entrants, closures to future accrual to limit liabilities and eventually a wave of buyouts. But having acknowledged this, DB schemes remain enormously important. The assets they hold are colossal and underpin pension provision for another generation or two of prospective pensioners. To date, government policy has been, on the one hand, to batter the plans with a regulatory and tax assault and, on the other, to establish the Pensions Regulator and the Pension Protection Fund to hold them to their promises. The whole structure does not look sustainable. At some point government will have to acknowledge this and act accordingly. In any event a more supportive policy towards DB schemes is desperately needed.

• Public sector pensions

There is the politically charged issue of public sector pension plans. I am in favour of good quality pension provision in both the public and private sectors. As private sector plans change, we must avoid a race to the bottom in terms of pension arrangements. But, while recognising the changes which have already happened in the public sector, there will be a need for public sector pensions to continue to evolve. What we need is a rational debate about this, which does not overstate the likely costs of current levels of benefit, rather than an argument reminiscent of the school playground.

• General capital market

Pension provision will be affected by the whole raft of capital market regulatory initiatives currently in train. The current focus is largely on the way in which pension scheme investors exercise governance responsibilities in the companies in which they invest. Despite their own disastrous supervisory failures, the authorities think that end investors should have done more to rein in the banks. And investors generally have indicated that they will seek to engage more actively in future. Beyond the current corporate governance push, other initiatives are in progress. Of relevance to pension schemes is Solvency II, a European Directive aimed at insurance companies, which is currently a hot topic. This impacts schemes indirectly by making annuities and buyouts more expensive, because more capital will be needed to back them in future. It may also, in time, impact schemes directly, as attempts are made to establish a uniform set of capital requirements for insurance companies and pension schemes. Beyond that, there will be plenty more.

It would be possible to operate in each of these four areas using the traditional British approach of muddling through. But it would be much better to take some informed policy decisions about the future shape of UK pensions and to act on them in a concerted way. The political climate in the next couple of years may well give us the opportunity of so doing.

Lindsay Tomlinson is chairman of the National Association of Pension Funds; Lindsay.Tomlinson@barclaysglobal.com