Pensions World

Could free TV licences and free bus passes be axed for millionaires? Ceri Jones, financial journalists reports

Deputy Prime Minister Nick Clegg believes that means testing benefits such as free bus passes and TV licences, currently given to pensioners solely on the basis of their age, could be a politically palatable saving.

The Liberal Democrat leader told the BBC: “We should be asking millionaire pensioners to perhaps make a little sacrifice on their free TV licence or their free bus passes.”

But far from being wealthy, some 6m pensioners do not pay tax, 4m pay at the standard rate and only 400,000 pay at the top rate, the National Pensioners’ Convention (NPC) said.

The unions also retorted that means testing is an ineffective way of getting help to those who need it most because the ones that need help most do not tend to claim and the concept also discourages saving.

Liberal Democrat ministers lobbied for the means testing of universal benefits to be announced in the Autumn Statement, but were rebuffed by their Tory partners. Another Spending Review is expected before the election in 2015.

Pension schemes to back airport

George Osborne’s strategy for £20bn of investment from pension schemes for infrastructure projects has been widely greeted as a win-win. The government’s memorandum of understanding with the National Association of Pension Funds, the Pension Protection Fund, and a group representing pension schemes and infrastructure fund managers is designed to facilitate investment in big infrastructure.

A national infrastructure plan published alongside the Autumn Statement mentioned 500 projects, but they do not get much bigger than an airport on the Thames estuary.

Mr Osborne is keen to “explore all options for maintaining the UK’s aviation hub status”, while Boris Johnson is particularly keen on a new hub in the east of London. Architect Lord Foster has already drawn up plans for a £50bn hub on the Isle of Grain, including a new Thames flood barrier and a high speed rail line that will connect to the High Speed One and High Speed Two routes.

Currently, however, UK pension schemes hold just 2% of their assets in infrastructure, largely because they are reluctant to take on construction risk.

One suggestion for the new airport is for the government to pay a construction firm an agreed sum to put the project together, and take possession of the asset on completion, which it could then sell on to pension schemes on a 30-year-lease in much the same way that the lease for High Speed One was sold for £1.4bn to investment firm Borealis Infrastructure and to the Ontario Teachers’ Pension Plan fund.

Auto-enrolment delay reprieve

Good news for employers; bad news for the pensions industry. That is the verdict on the government’s decision to delay auto-enrolment for smaller employers with fewer than 50 staff. Small employers previously scheduled to be staged in from 1 April 2014 can now delay until May 2015 – a meaningful period of grace, but a far cry from the rumour that small employers would be excused auto-enrolment entirely, which would have undermined the government’s entire policy.

However, the decision has ramifications for larger employers by potentially delaying the date at which they will have to pay the higher 3% level of contribution to their schemes. The primary legislation stipulates that large employers will not have to pay 3% until every employer has been paying 2% for a year.

In fact, only the initial level of contribution need be paid until such time all businesses have been staged in, which will now be 1 March 2017.

Legal & General pensions strategy director Adrian Boulding believes these delays will increase the temptation for employers to level down. “Delaying the phasing will increase the difference between a large employer’s current scheme and the statutory minimum,” he says. “That will tempt some employers to auto-enrol people at the statutory minimum.”

Labour shadow pensions minister Gregg McClymont says the delay has damaged the government’s pensions credibility, particularly as the Department for Work and Pensions (DWP) was at pains to stress no change would be made to the schedule just a few days before the announcement. “Auto-enrolment is the first in a number of hurdles to getting our pension system viable for the 21st century and beyond,” Mr McClymont told Pensions World. “If you look at the pensions landscape, we have to get cracking or this otherwise down the line the situation will be very, very difficult. The government’s credibility on auto-enrolment is in question – by moving the timetable back and beyond the next general election, they have thrown their commitment to this vital reform into doubt.”

The decision also raises concerns over the impact the delay will have on Nest’s ability to repay its £120m establishment loan. Nest and other providers will have business models structures based on higher, and sooner, member and contribution levels. Nest and other providers may now have to hike their charges.

Nest stressed that all small businesses will still be staged in at the start of the next Parliament. “Around 40 employers of different sizes and sectors are already live with Nest, with around 60 more due to come on board by October 2012,” said its managing director, scheme development, Helen Dean. “Longer term, it does not change the eventual numbers expected to start saving for their retirement under automatic enrolment.”

The DWP says the timetable for employers with more than 50 but fewer than 3,000 employees will be adjusted by stretching the transition for this group across the year vacated by small employers. It promises a revised timetable of staging dates early in the New Year.

CPI – round one

The unions have lodged an appeal against a High Court verdict in favour of the government’s decision to use the Consumer Prices Index (CPI) in place of the Retail Prices Index (RPI) to calculate annual public sector pension increases.

The unions had argued that the switch was unfair to millions of members and reneged on promises to keep the RPI, with a cumulative impact equal to around 15% of retirement benefits.

The case was rejected by Lord Justice Elias, sitting with Mr Justice McCombe and Mr Justice Sales, at the High Court in London. Three of the four grounds of challenge were dismissed unanimously, while one was rejected by a 2–1 majority.

Government lawyers claimed that the CPI could be considered “a more appropriate measure of changes in the general level of prices”, and that the change would save the Exchequer £6bn a year, helping to repair the UK’s damaged balance sheet.

Lord Justice Elias and Mr Justice Sales ruled that the government was entitled to consider cost implications when choosing which index to adopt, provided the selected index could properly and reasonably be said to measure price changes.

The unions immediately instructed law firm Thompsons Solicitors, which is representing six unions, to lodge an urgent appeal. They were also quick to stress the irony that the government has just announced it will link next year’s rises in fuel duty and rail prices to RPI.

Another irony is the Debt Management Office’s decision not to issue CPI-linked gilts in 2012/13 as it is fearful of the potential risks, despite many responses to the government’s consultation highlighting the benefits of CPI-linked gilts to investors.