By Joanne Livingstone and Alan Morahan, Punter Southall
To date, this has been an area where companies and trustees have been largely on their own against a backdrop of continual low interest rates and retrospective changes, for example to address Guaranteed Minimum Pension benefit inequalities originally introduced to mimic the state provision. We hope that Ros will get involved in encouraging the development of innovative designs for new types of risk-sharing pension schemes as was so much a focus of her predecessor. We additionally hope that she can help to create an environment where trustees can invest in safe products that produce at least some return net of inflation.
And confidence in pension arrangements will go up immeasurably if Ros can ensure that George Osborne does not see pension funds of all kind as a source of convenient tax revenues and funding. This means ensuring that there are no new taxes introduced on asset funds as happened in Ireland or tax-free lump sum benefits and that tax allowances are restored to the levels required to support saving for pensions of two-thirds of final salary as was the case for so many of those retiring before the so-called tax simplification or better still abolished completely in the case of the Lifetime Allowance. The impact of the restrictions announced to date already run the risk of destabilising the cash flows from public sector schemes by creating disincentives for the highest earners who are being asked to pay the highest percentage contribution rates to remain in the scheme. If such members opt out, this could leave a shortage of contribution inflows to meet the outflows needed to cover both the pensioner payments being paid from such unfunded schemes and the increasing levels of tax charges that the schemes will have to pay upfront for those members who have breached the Annual and Lifetime Allowances.
The work on bringing in the new State Pension Scheme should also not be underestimated. The impact of the changes has yet to be felt and there are still no illustrations of the benefits available for most of those who will be affected. Inevitably there will be winners and losers and hence perhaps a second round of changes to the legislations to be addressed.
With regard to the challenges for defined contribution schemes, it is expected that, within the next 10 years, their assets will overtake defined benefit assets. It is therefore imperative that the new Pensions Minister does everything in her power to assist this sector’s development, to the benefit of all stakeholders.
Over the past five years, we have seen an unprecedented level of change to DC provision and the industry is creaking under the weight of this. Service standards are being affected and letters are already appearing in the press from disgruntled policyholders, unable to get their hands on their pension pot for a variety of reasons, including service issues, policy conditions or scheme rules.
Ros, with her consumer champion background, may not have much sympathy for pension providers and scheme trustees, but she should allow the industry a period of time to adapt to the new environment before imposing further change.
After all, whilst auto-enrolment appears to be a success, something like a million employers have still to reach their staging dates so there are challenges ahead and Ros will not want a perceived success to turn into a failure on her watch.
That is not to say that future planning should not take place. Auto-enrolment contribution rates are ridiculously low and even the planned increases do not get us to a savings level that will adequately provide for people in retirement. Therefore, serious consideration should be given to future contribution increases and the sooner these are known the sooner we can all plan for them.
We would call for her to consider the abolition of the Lifetime Allowance and revisiting the levels of the Annual Allowance, and we believe she should allow pensions and ISAs to work together within auto-enrolment legislation, which could be of particular interest to the young. And she must create an environment in which the pensions industry is encouraged to develop new annuity based products, as we should not diminish the benefit of a guaranteed income.
Back in 2006, during the Labour administration, Ros stated, “Pensions policy is a shambles and this Government could go down in history as the one which destroyed a once-great pensions system”; she now has an opportunity to ensure that we have a pension system that is fit for future generations and the envy of the world.
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