POLITICAL STAGE Delaying action
There are rumours of possible delay or even exemption from auto-enrolment for smaller businesses reports Ceri Jones, financial journalist
The political consensus on auto-enrolment could be threatened by proposals from Adrian Beecroft, the venture capitalist charged by David Cameron to lead a review of business regulation, who has argued for concessions for small businesses.
Pensions Minister Steve Webb is trying to hold the consensus together, telling Parliament on 18 October that “2012 will definitely happen next year. We do not believe that this important programme should be delayed. Interestingly, the CBI does not believe in a delay, either. It recognises that the biggest firms, which will come in next year, are already planning. In many cases they have already chosen their providers. They are getting on with it and the last thing we need is new uncertainty about the start of auto-enrolment. We will therefore be pressing ahead.”
Mr Webb’s stress on large firms could, however, leave the way open for a delay or even exemption for smaller employers. Further clarity is expected in the Chancellor’s autumn statement on 29 November when such a decision could be presented as a broader response to the economic malaise.
Minister in the shadows
Press comment that the new Shadow Pensions Minister Gregg McClymont previously voted against auto-enrolment is unfounded, however. Far from making a swift and alarming U-turn since taking up his new role in October, Mr McClymont in fact voted against the Pensions Bill on 20 June, when the Coalition was pushing through not only auto-enrolment but the changes to the qualifying state pensions age and the switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) for revaluing benefits.
Scheme pensions priced outPensions legislation is littered with unintended consequences, so it is no surprise that the Pensions Bill (which received royal assent on 3 November) has also created havoc. The Bill cleared both Houses of Parliament despite a last ditch attempt by Labour to amend it to prevent anybody having more than one year added to their state pension age. However, an amendment to the Bill has reclassified scheme pensions as defined benefit (DB) schemes, exposing them to tougher regulation and costs by forcing them to guarantee members a set level of income for life. At the moment, income from scheme pensions can simply be reduced if investments perform badly, but under DB rules any deficit would have to be made good or risk the scheme falling onto the Pension Protection Fund. As a DB arrangement, each scheme would also need a new set of scheme rules and a trust deed, triennial actuarial reports and deficit reduction plan. John Lawson, head of pensions policy at Standard Life, estimates the changes will cost providers up to £30,000 per scheme. He adds that members of scheme pension are now stymied because they cannot go into drawdown because their benefits have already crystallised.
The amendment is the result of a High Court case which gave the Department for Work and Pensions (DWP) powers to reclassify DC schemes such as hybrids as DB. The DWP has regulatory powers to undo any unintended consequences; the question is whether it is minded to do so. One positive indication is its comment that there is flexibility in the Bill to make further regulations “if necessary to avoid adverse consequences”. |
“I, and the parliamentary Labour Party, voted against the Bill as a whole, partly because we think that it does not do enough to support the principle of auto-enrolment,” Mr McClymont explained. “I want to strengthen and protect auto-enrolment.”
He further pushed Steve Webb on the government’s commitment to auto-enrolment on 24 October, asking whether the Minister could “reassure the House that whatever Beecroft recommends, no business large or small will be allowed to opt out from auto-enrolment” to which Mr Webb responded that “2012 will go ahead as planned”.
Mr McClymont has been an MP for Cumbernauld, Kilsyth and Kirkintilloch East for just one year. A particularly strong critic of the UK government’s economic policy, Rachel Reeves’ replacement is an academic by background; he completed a doctoral thesis in modern British history at St John’s College, Oxford, and was a tutorial fellow at St Hugh’s College until May 2010.
A look at Hansard shows he is in the habit of asking a lot of questions about the falling standards of living for pensioners – there are pages of questions on bus passes alone!
United in tax relief
On the tax relief front, the Coalition seems to be moving towards imposing an end to higher rate relief on pension contributions. In a pamphlet for the CentreForum think-tank, Lord Newby, the LibDem’s Treasury spokesman in the Lords, has called for the abolition of higher rate relief and also recommends restricting tax free lump sums to £42,000. The argument is that taxing lump sums will effectively boost the funds used for annuities, keeping people off means tested benefits and also producing a bigger tax take on monthly income – to the tune of over £500m a year.
“A close inspection of this issue is long overdue,” writes Lord Newby. “Tax relief on pensions must not be ring-fenced from efforts to make the overall tax system fairer. It surely should not be the role of the state to help the already well off enjoy an affluent retirement, particularly when it struggles to provide a half decent basic pension to many of its citizens.”
IPSA to take over the running of MPs’ pension schemesMP expenses body IPSA (the Independent Parliamentary Standards Authority) will take over the running of MPs’ pension schemes next April, but not everyone backs the decision. IPSA will introduce a new pension by 2015 in line with other public sector schemes and is likely to raise contribution rates for MPs from next April when other public sector workers can expect to face contribution increases.
But Lib Dem Bob Russell said he had “zero confidence” in IPSA, which has disappointed some MPs in the way it runs their expenses scheme. Mr Russell has been locked in a battle with IPSA about his claims for attending to Parliamentary duties in London – IPSA wants him to switch from the flat he bought with another MP into rented accommodation, even though Mr Russell estimates this will cost an additional £15,000. |
The Institute for Fiscal Studies has long recommended scrapping the 25% tax free lump sum and replacing it with a pension scheme top up at the point of annuitisation, arguing that the current system is a poorly targeted use of government subsidy.
Industry practitioners believe that limiting tax free cash would severely damage pension savings, however. “A tax on lump sums withdrawn from pension pots would be the final nail in the coffin for pensions,” says Mike Morrison, head of pensions, AXA Wealth. “This proposal, alongside the current reforms to higher rate tax relief, would be disastrous for saving.”
Public sector pension impasse
Unison’s decision to go ahead with strikes on 30 November, despite significant concessions from the government over public sector pension terms, has prompted criticism that the unions and their members do not understand the cost of the benefits offered.
But Chief Secretary to the Treasury Danny Alexander has also drawn ridicule for asserting that the new deal, if accepted, could stay in place for a further 25 years and also for sleight of hand in the calculations he used for case studies quoted to defend his stance.
The enhanced offer includes more generous accrual rates of 1/60th rather than 1/65th, and allows the over-50s to keep their current benefits and retirement age – in most cases 60.
The offer is for civil servants, teachers and NHS and local government employees and similar changes are likely to be proposed for the armed forces, police, firefighters, judges and MPs, although a concession is expected on retirement age for the uniformed services.
The unions argue the costs of public sector pensions as a share of gross domestic product will drop by 2060, owing to earlier reforms. They are particularly angered by the additional 3.2% rise in member contributions starting next April.
In one particularly bitter exchange, Mr Alexander was denounced by Unite for using misleading data to attempt to manipulate public opinion. Mr Alexander had claimed that a nurse with a full career, retiring on a salary of £34,200, would receive a pension of £22,800 a year under the proposed scheme, compared with only £17,300 under the current scheme. But the example was based on a nurse working for 43 years and retiring at 68 in the proposed scheme compared with a nurse working for 35 years and retiring at 60 in the current scheme – eight years longer.
Certainly the unions are left looking relatively intractable. “Despite the rhetoric of the Coalition today and George Osborne in the run up to election, this is a capitulation by the government,” says John Ralfe, independent pensions consultant.
- Issue:
- December 2011
Author: Ceri Jones
Ceri Jones has been writing about pensions for 25 years, first editing Pensions & Employee Benefits magazine and subsequently the FT's Pensions Management magazine in the mid-1980s.
Email this page 