POLITICAL STAGE Raising the bar
The qualifying number of years for a state pension might need to increase by as much as ten years, reports Ceri Jones, financial journalist
Just as you comprehend that 35 years of paying national insurance is the requirement for a full state pension, commentators such as Ros Altmann are suggesting that the qualifying number of years should be increased to as much as 45. This could facilitate a fairer uprating system than the triple lock, while not penalising older and poorer pensioners, Dr Altmann says. She hopes the forthcoming Cridland Review will be making recommendations in this area.
Meanwhile, the head of that review, John Cridland, has been drawing attention to how the reduction in immigration as a result of Brexit could escalate the state pension age, although the precise impact is hard to predict.
Hymans Robertson has used projections from King’s College London that migrant numbers will fall from 600,000 to 140,000 over three years to calculate that the state pension age might have to increase by 18 months for those under 40.
Dr Altmann would also like to see different starting ages for different cohorts, but Cridland has let it be known that he views this as too messy to administer.
We need a fairer uprating to the state pension than the triple lock.
Pensions minister calls for pre-1997 indexation
Does the right hand know what the left hand is doing? At a time when much of the pension industry is contemplating the merits of a statutory override to pension increases, probably linked to the Consumer Prices Index (CPI), to reduce costs and help maintain the sustainability of defined benefit (DB) schemes, pensions minister Richard Harrington has been calling for sponsors to offer discretionary increases for pre-1997 accrued benefits where they currently do not do so.
“I’ve written to the CEOs ... to come and see me to explain themselves,” he told the Association of Member Nominated Trustees’ spring conference.
The minister appears to be responding to lobbying by SNP MP Corri Wilson and Conservative MP Nicky Morgan on behalf of members of the Digital Equipment Ltd pension plan, now a section of the Hewlett Packard’s Retirement Benefits Plan, and the 3M Pensions and Life Assurance Scheme.
MP Ian Blackford, the SNP spokesperson on pensions, also tabled an amendment to the pension schemes bill.
The Pensions Regulator has calculated that 21% of schemes do not provide indexation in line with inflation for pre-1997 benefits.
While these schemes offer no pre-1997 increases at all, much current thinking is going the other way, supportive of allowing pension increases to be weakened to CPI for all schemes.
Oppositions back WASPI
The law firm representing the Women Against State Pensions Inequality (WASPI) campaign has initiated its legal challenge, sending a formal letter to the government with a list of demands on
Pensions minister Richard Harrington has recently reaffirmed the government’s position, but the Labour and Scottish National parties both say they would act if they gained power. Labour’s plan is for Pension Credit worth up to £155 per week to be extended to the half a million women who were due the state pension before the Coalition made its changes, and further help for those not entitled to means-tested Pension Credit under these proposals.
“The government has completely failed to act to address the plight of these older women,” said Debbie Abrahams MP Shadow Work and Pensions Secretary. “We are committing to the extension of Pension Credit to support the vulnerable women affected by the government’s chaotic approach to the state pension.”
WASPI Voice, an arm of the WASPI campaign, is launching a crowdfunding campaign to raise money for affected women who are struggling.
WASPI also successfully initiated a crowdfunding exercise to back a legal challenge to the changes last October.
**Zurich Life has analysed 250,000 pension plans from its corporate client base. Over the four years from 2013 to 2016, men have received pension contributions of 7.8% of salary each year from their employers, compared with 7.0% for women, which the researchers put down to career breaks for women and men typically working in sectors with more established or generous pension schemes. While the issue is no secret, its scale is surprising. The gap amounts to a shortfall of £47,000 over a woman’s working life.
Employers ducking taper rule admin
One in three large firms may be limiting pension contributions for their scheme members to £10,000 a year, as they are fearful of breaching the new tapering rules, according to a survey of Hymans Robertson clients.
These companies have decided it is safer to reduce contributions to their top executives, rather than risk exceeding the limits which could lead to unexpected tax charges, disputes and ill-feeling.
The “annual allowance taper” slashes the amount those employees earning over £150,000 can put into a pension, but the rules, which came into force last year, introduced a sliding scale, ultimately limiting individuals to as little as £10,000 in contributions per year.
One complicating factor is that the right decision depends on personal information that employers may not know about their employees, and that employees may not want their employer to know. One measure is the employee’s “threshold” income, which includes income from all sources, not just salary, including investments and buy-to-let properties, and even income given up in a salary sacrifice arrangement.
Where the “threshold” total is less than £110,000, the annual allowance will be £40,000, but if it is higher, the member’s adjusted income must be calculated, which is the amount including all employee and employer pension contributions. If a member’s threshold income is more than £110,000 and their adjusted income is over £150,000 a year, then their annual allowance starts to drop from £40,000 to £10,000 for adjusted incomes of £210,000 or more.
The consultancy said that 1 in 3 of its clients are simply capping contributions at £10,000 a year for all staff, and in some cases making up the shortfall with cash. The other two thirds let their employees run the risk of breaching the annual allowance, and suffering a tax charge.
Few employees are expected to have the knowledge to make up any shortfall through personal pensions and the numbers who have breached the limits are rocketing. The problem will worsen over the next few years as the amount of unused pension allowances that can be carried forward from previous years is set to fall.
Green Paper disappoints
The government’s Green Paper on the sustainability of DB pension schemes has done little to extend the debate about how best to manage the risks faced by DB schemes, provide protection for members and limit the impact of large deficits on corporate activity.
The Department for Work & Pensions (DWP) says it is not convinced of the case to make changes across the board, but only for “stressed” employers and schemes that demonstrate they cannot meet their deficit reduction payments longer term.
Regarding a statutory override to allow CPI to be adopted as the measure for indexing, the DWP says “a very high bar in terms of evidence would need to be met before such an approach could be considered”.
The government is also keen to harness economies of scale and would like to create a voluntary “superfunds” system to consolidate smaller schemes. It had been suggested that the Pension Protection Fund should manage such a scheme, but Richard Harrington favours the view that it should be open to tender.
Many commentators pointed out that the UK private sector problem pales into insignificance compared with public sector pension liabilities, which account for 81% of GDP. Others note that nothing has been said to address the problem that DB schemes fare more favourably with the lifetime allowance, with the pension commencement lump sum based on 20 times income when current market conditions suggest it should be more like 30 or 40 times.
Former pensions minister Steve Webb says he is disappointed by the lack of firm proposals in the paper, calling it “remarkably timid on the idea of giving the Regulator more power to challenge takeovers which could damage a pension scheme”. There is “a real chance the government may end up doing almost nothing,” he said.
DB dealing with spousal problem
DB schemes are increasingly invoking rules allowing them to reduce spousal pensions where there has been a large age gap, usually ten years, between the deceased and their partner. Many so-called “young spouse’s reduction” clauses cut the payment made to the surviving spouse by 2.5% for every year of the age gap over ten years. In one recent case, a centenarian Leslie Wise died leaving a wife 38 years his junior, and the reduction in her benefits amounted to 70%.
Sir Philip Green’s £363m settlement to plug the BHS scheme deficit has generally been well received. One aspect of the arrangement that has received little attention, though, is that pension increases under the new scheme will be limited to legislative minimums. Pre-1997 benefits will be increased at 1.8% a year. The original scheme offered increases to members in line with the Retail Prices Index, capped at 5% for benefits accrued before April 2005 and 2.5% for those accrued after. Scheme members may not be fully aware of the impact these limited revaluations will make over time.