Simplicity, security and choice · 2016-07-01 · Simplicity, Security and Choice – ABI response...

Simplicity, security and choice ABI response to the pensions Green Paper March 2003

Simplicity, Security and Choice – ABI response to the pensions green paper

CONTENTS

Page

Executive Summary

3

Introduction

6

A Better Future For State Pensions

8

Creating Incentives To Save In A Voluntary Pension System

11

Simplification, Regulation And Protecting Investors

17

Informing Consumers

25

Creating A Simple Tax Framework

32

Extending Opportunities for Older Workers

37

Women and Pensions

39

Conclusion

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Annex A – Response To The Technical Annex, Security, Simplicity And Choice

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EXECUTIVE SUMMARY • The Green Paper is a missed opportunity: The Green Paper does not go

far enough fast enough and lacks clear direction. While many of the proposals are helpful, they will not, taken together, generate a step change in the level of private pensions savings and make significant inroads into the savings gap. This is a missed opportunity. We recommend a radical package of reforms designed to get Britain saving for retirement.

• The Government must set clear targets: There must be a clear direction for

government pension policy articulated through explicit government targets for the level of private saving it expects. We recommend the target is set to cut the number of people seriously under-saving from 3 million to zero and the number potentially under-saving from 5-10 million by half; and which ensures that 75% of employees receive an employer contribution of 5% or more. The NKR should check that progress towards meeting the targets is being made.

• A robust and durable state pension system must be established: A

successful private pension system can only be built on the foundations of a robust and durable state pension framework that provides benefits at adequate levels, removes reliance on means-testing and gives people clear incentives to save beyond the state minimum. The current state pension system fails these tests and until these issues are addressed, the effects of any reform of private pensions will, at best, be muted. We recommend reforming the state pension system by enhancing the State Second Pension (S2P) to ensure that everyone with a reasonable working record is kept off means-tested benefits whilst also providing incentives to save so that it genuinely pays to save.

• We support the voluntarist approach to private pension saving: But this

can only work if there are genuine – financial – incentives to save. The Green Paper fails to provide any genuine new incentives to save beyond some measures designed to inform people about their entitlements. This low key approach simply will not work. This is the last chance for voluntarism. We recommend that the Government introduces a package of employer-focused fiscal incentives to raise levels of pension saving. If it does not, compulsion must follow in short order.

• A genuine and fair partnership is essential: Ensuring that more people are

able to save more for retirement requires a genuine and fair partnership between the Government, the savings industry, employers and individuals, which recognises the need for pension providers (including occupational scheme providers) to be able to conduct business in a cost-effective way. We recommend that all the key stakeholders are actively involved in designing the solutions to our current pensions crisis.

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• Fiscal incentives are the way to encourage higher savings levels: The Green Paper sets out ways to encourage people to save. But this is not enough. In our voluntary pension system, in which the need to raise retirement savings levels is urgent, people need clear financial incentives to save. We recommend the introduction of a Pension Contribution Tax Credit (PCTC) and a Workplace Advice Credit (WAC) both focused on employers, and which could help over 4 million working people, taking more than £5bn off the savings gap.

• Informed consumer choice requires government action: The Green

Paper rightly places considerable emphasis on increasing consumer awareness of their pension entitlements. Consumer awareness campaigns must also focus on the need to save for retirement and the risks of not saving. The Government must take the lead in promoting retirement saving. We recommend a national strategy to increase consumer awareness. Employers have a pivotal role to play. But the government must also take a leading role with a hard-hitting advertising campaign.

• Employers have a central role to play in promoting pensions: The role of

employers in encouraging pensions take-up is indisputable – the presence of an employer contribution alone can see scheme take-up levels increase from 13% to over 70%1. We recommend that employers should be permitted to actively promote the schemes as well as being actively encouraged by government and regulators to contribute to schemes.

• Tax reforms: Collapsing eight pensions tax regimes into one is a welcome

and long-overdue step. But action must be taken to smooth out the remaining rough edges around the lifetime limit. We recommend that the level is increased in line with earnings and also to take account of longevity and investment conditions. The entitlements of those whose pensions exceed £1.4m on ‘A Day’ must be fully protected and a neutral recovery charge applied to large funds.

• We support the New Kind of Regulator (NKR): A risk-based regulator to

replace Opra is a welcome development. The regulator must focus its efforts on those schemes where members’ rights are most at risk. We recommend that the NKR should have a small number of statutory objectives which it interprets flexibly.

• A Central Discontinuance Fund will not work: We support measures to

protect scheme members, particularly where the scheme and the employer are insolvent. But a Central Discontinuance Fund (CDF) is no way to remedy this situation. It will not work and there is no market for this product. We recommend that if the Government wishes to proceed with a CDF, it

1 What makes people save? ABI, November 2002.

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must be underwritten by the State. • Simpler pensions will encourage more saving: Green Paper proposals to

simplify pensions administration are welcome and will encourage employers to run schemes and employees to join them. But the proposed reforms will still mean legislative arbitrage between pension types. We recommend a more radical pensions simplification combined with measures to protect scheme members.

• Self-employed: As a group, the self-employed under-save for retirement. The

proposals to allow the self-employed into the state second pension on a voluntary basis will help, but do not go far enough. We recommend that the self-employed are required to save in a second pension on the same basis as employees.

• Timing: ABI members are keen to work with the Government to implement

the changes in the Green Paper efficiently and effectively. But it will be counter productive if the changes are introduced too soon and providers do not have time to make the necessary systems and administrative changes. We recommend that ‘A Day’ for both the Inland Revenue and DWP changes is no earlier than 12 months after all legislation and regulations have been finalised. This will mean April 2005 at the earliest.

• Stability: Continued uncertainty has the dual disadvantage of deterring

consumers from starting to save for retirement whilst at the same time discouraging employers from continuing to offer pensions. It also increases costs to commercial pension providers. We recommend that following these Green Paper reforms there is a period of stability which allows consumers, employers and providers to plan and raise retirement savings levels.

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INTRODUCTION 1. The ABI2 believes that the Green Paper is a missed opportunity to make the

pension prospects of future pensioners significantly better. As a nation we are under-saving for retirement on a massive scale. We can illustrate the scale of under-saving either through identifying a national savings gap, which research for the ABI3 has shown as being £27bn per year, or through identifying, as the Green Paper does, the number of individuals who are under-saving. Both approaches are equally valid.4 Both point to the massive challenge facing policymakers. Both point to the need for radical action now.

2. As a starting point, the Government must set clear, measurable targets to

reduce the level of under-saving. Having identified 8-13 million people – up to half the working age population as under-savers – the Government should explicitly target a reduction in their numbers. We propose targets to reduce, within five years, the number seriously under-saving to zero and the number potentially under-saving by half. Since employer contributions will be a crucial component in meeting these targets, we also propose a secondary target: to ensure that 75% of employees receive an employer contribution of 5% or more.

3. The policies to meet the targets must also be in place. We believe the Green

Paper fails here in two crucial areas. First, the Government must get its own house in order and create a state pension framework which is clear, certain and which provides unambiguous incentives to save: the essential basis for any reform of the private pensions framework. Second, the Government must provide new, targeted incentives which help employers and individuals to meet their part of the bargain and step up their pension contributions. Because of these failings we believe the Green Paper will have, at best, a marginal impact on under-saving.

4. Our response shows how we believe the Government should address these,

and other, key areas. The policies we set out would have a clear and significant impact on the number of people under-saving for their retirement:

2 The Association of British Insurers (ABI) represents over 400 insurance companies, which between them account for over 95% of the business of UK insurance companies. Every day UK life insurance companies pay out £140m in pension benefits, £13m more than the government. £210 billion is invested in insurance-administered occupational pensions and £350 billion in insurance-administered personal pension schemes. The UK insurance industry accounts for over 20% of investment in the stock market. 3 The Future Regulation of UK Savings and Investment – targeting the savings gap Oliver, Wyman and Co, September 2001. 4 Both approaches take into account the accumulation of pension rights and other assets, including housing, which may generate retirement income, and both are based on realistic target retirement incomes.

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• the Pension Contribution Tax Credit would ensure that 3 million

employees receive a 5% employer contribution to their pension fund; • the Workplace Advice Credit would help 4 million employees receive

advice in the workplace; • bringing the self-employed into the State Second Pension would give 2.5

million self-employed people a sound basis on which to plan their additional provision.

5. We are keen to work with the DWP, HM Treasury and the Inland Revenue to

ensure that the proposals in the Green Paper can be introduced in a workable and timely fashion that meets the Government’s – and our – aim of ensuring that more people can save more for retirement. We would be happy to discuss further any of the points raised in this submission.

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A BETTER FUTURE FOR STATE PENSIONS A successful private pensions framework can only be built on the foundation of a clear and certain state framework. If this foundation is not right then all the other proposals in the Green Paper and, indeed, the voluntarist system itself will not work as the Government intends. We recommend:

• A radical reform to the state pension system to increase the state pension rights of lower earners, whilst giving moderate and higher earners a clear incentive to save in a private second pension.

• Going beyond the Green Paper proposals by compelling the self-employed into the State Second Pension or a second tier alternative.

Creating a better state pension framework 6. Without clarity and certainty on what the state will provide, individuals cannot

decide – and their advisers cannot advise – on an appropriate level of private provision. The Green Paper promises the continuation of the current framework. While this framework can deliver for today’s pensioners, it is increasingly clear that it is storing up problems for future generations.

7. State pension benefits and their interaction with private saving need urgent

attention if we are to avoid a future in which large numbers of pensioners retire on inadequate incomes; in which the Government fails by a wide margin to meet its target of raising the proportion of retirement income coming from private sources from 40% to 60%; and in which future generations of taxpayers are left to meet the costs of rising means-tested benefits.

8. We believe that a fundamental problem with the current system lies with the

Pension Credit. This, the Green Paper asserts, will enable the Government to meet its twin aims of providing a foundation for all pensioners with resources targeted on those most of need. The ABI agrees with the aims, but we do not believe that the current system will deliver them.

9. The Pension Credit will blunt an individual’s incentives to save, by imposing

an effective withdrawal rate of 40% on the income from their savings. This will affect the majority of future pensioners – 82% according to the Institute for Fiscal Studies5, and all the people the Green Paper identifies as under-saving – and will have knock-on effects on the affordability, adequacy and durability of the state framework as a whole. If people do not save as much as the Government anticipates – and the underlying assumption of saving as a proportion of earnings will remain constant looks optimistic – then there will be greater demands on Pension Credit expenditure. The Government will then

5 The Tax and Benefits System – the decision to invest in a stakeholder pension, Briefing Note No. 28, IFS 2002.

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be faced with a choice between breaking its promise to future taxpayers, and increasing expenditure, or breaking its promise to future pensioners, and reducing benefit rates.

10. Our proposals6 build upon the current framework to:

• Make the State Second Pension (S2P) work. We propose a flat-rate S2P, at more generous levels – up to 50% higher – than now. Benefit entitlement would be based on earnings of £15,000, while rebates for contracting out would remain earnings-related. This would provide adequate state pensions as of right to lower earners, while giving higher earners a clear incentive to contract out and receive a kick-start to their private saving.

• Make S2P work for everyone. The self-employed should be brought into

the new, more generous S2P on broadly the same terms as employees. This would ensure that all workers – whatever the nature of their employment – would be provided with an adequate basis on which to plan their retirement income.

• Reduce the price of saving for retirement. With a more generous S2P –

sufficient to lift future pensioners above the means-tested minimum income – there will be no need for the Government to ‘reward’ savings through the Pension Credit. We propose abolishing the savings credit element of the Pension Credit thereby removing the disincentive for the majority of tomorrow’s pensioners to save more because they know that each £1 their saving produces will reduce their income from the state by 40p. Savings will earn their own reward, in full. The Government would be able to promote, unambiguously, the message that it always pays to save.

• Leave the basic State Pension (BSP) and state pension age unchanged.

Recommendation 1: The Government must ensure a better future for tomorrow’s pensioners and tomorrow’s taxpayers by reforming the state framework now. Recommendation 2: A revised flat rate State Second Pension combined with earnings-related contracting out rebates will achieve the dual objectives of improving the pension rights of low earners and providing incentives to save in a private pension. 11. Taken together, our package would ensure a settlement that delivers:

6 Set out in more detail in our publication, Affordability, adequacy and incentives: a better future for state pensions, March 2003.

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• containment of public expenditure, with expenditure no greater than under the Government’s current plans;

• an adequate minimum income for all pensioners, above the level of the

minimum income guarantee (MIG), providing a sound basis on which all pensioners can plan their retirement income; and

• the protection of incentives to save, and clarification of the message that

“those who can save, should save”. Better pensions for the self-employed 12. The Green Paper proposal to enable the self-employed to opt-in to S2P is

inadequate: membership should be compulsory, as for employees. Otherwise taxpayers will face the risk of topping-up the benefits of the low-paid self-employed (for whom the decision to opt in will be an easy one) without support from higher National Insurance contributions from the better paid self-employed (for whom the decision will be finely balanced).

13. If the Government is unwilling to extend compulsion to the self-employed it

should, at least, make membership of S2P the default option. Self-employed people would then be able to opt-out. This would help maximise the coverage of S2P among this vulnerable group.

Recommendation 3: The self-employed should be brought into the State Second Pension or be required to take out a private second alternative.

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CREATING INCENTIVES TO SAVE IN A VOLUNTARY PENSION SYSTEM A voluntary private pensions system will only work if there are real financial incentives built into the framework to ensure that more people save more for retirement – our aim and the Government’s aim. The proposals in the Green Paper fail to provide these incentives. This ‘do nothing’ approach is simply not viable: the government must either face the modest costs associated with introducing financial incentives or make the system compulsory. We recommend:

• Government targets, against which the success of the voluntary approach can be measured.

• An independent body to measure progress against these targets. • The introduction of an employer-focused Pension Contribution Tax Credit

to generate higher levels of employer and employee contributions to pensions.

A clear direction for government pension policy – new, measurable, targets 14. The Green Paper takes as its twin themes working and saving for retirement.

Working longer and saving more are undoubtedly key ingredients for a bigger income in old age. But they do not amount to a clear direction for government pension policy. The Green Paper is silent on the question of how many people should be saving more for retirement, by when and by how much. The result is confused and ambiguous policymaking that fails to get to the heart of the nation’s pensions ‘crisis’. In view of the scale of the current savings gap, this is inadequate. The Government must take this opportunity to set out a clear direction for government pension policy.

15. We believe this can best be articulated through explicit and unambiguous

government targets for the level of private saving it expects five years’ time and at what levels. This approach is consistent with that taken elsewhere in government. For example, targets have been set for reducing child poverty. In an area as important as pensions, it is crucial that similar targets should apply that allow clear policies to be set. In parallel, an independent assessment of progress towards the targets will be required against which the efficacy of the voluntarist approach – which the government has opted to continue – can be judged.

16. In assessing what these targets should be, we have taken as our starting

point the Green Paper itself. The Green Paper says that 3 million people are currently seriously under-saving for retirement and a further 5-10 million are potentially under-saving. A reasonable target, therefore, would be to reduce the number of under-savers in a way that locks in the rights and responsibilities of individual savers and their employers, underpinned by a

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strong state pension system. The ABI recommends a target which, within five years:

• reduces the number of people seriously under-saving from 3 million to

zero; • cuts by half the numbers potentially under-saving; and • ensures that 75% of employees receive a 5% employer contribution to

their pension. 17. The precise detail will be for the Pensions Commission to determine. But only

through the adoption of such targets can any real assessment of the success – or otherwise – of the voluntary pensions system be made, and on that basis a decision to move beyond voluntarism to compulsion.

18. The absence of significant measures to generate demand for new pension

saving and saving at higher levels means that, at best, the Green Paper proposals will make only a marginal impact on reducing the numbers of people seriously or potentially under-saving. By contrast, our package of new incentives, combined with radical pensions simplification, could help up to 9.5 million workers save more for retirement, many for the first time.

19. New Government pension targets will only have meaning if they, and the

policies underpinning them, are regularly and independently judged. In our view, the most appropriate body to conduct this exercise is the New Kind of Regulator (NKR). We therefore propose that the NKR should monitor progress towards achieving the pension targets. Alternatively, the Government may see an on-going role for the new Pensions Commission. This body may also be qualified to take on the role of judging progress on the pension targets, but only if its membership is expanded to include representatives of the savings industry and savers.

Recommendation 4: Clear government targets must be set which, within five years, significantly reduce the levels of under-saving and increase levels of employer contributions. Recommendation 5: The NKR should monitor the Government’s success at meeting the pensions targets. Alternatively, the Pensions Commission could take on this role, but only if its membership is truly representative of savers and the savings industry. Support for voluntarism 20. In principle, the ABI supports the Government’s voluntarist approach to

pensions. But voluntarism will only work if there are drivers built into the system to encourage individuals – and their employers – to save for retirement. We do not believe the Green Paper’s mix of gentle encouragement to save, combined with more information, is adequate. As a

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matter of priority, the Government must introduce affordable and workable financial incentives to generate a step change in savings behaviour. In the absence of these incentives, the Government will have to give urgent consideration to abandoning voluntarism in favour of a pensions system significantly in excess of the compulsion that already exists. The current “do nothing” approach simply will not work.

Recommendation 6: The Government must introduce a package of workable and affordable incentives to generate higher levels of pension saving or abandon the voluntary approach in favour of compulsion. Creating real incentives to save 21. The Government has accepted Ron Sandler’s view that individual financial

incentives to generate higher levels of saving do not work. Sandler says, they simply alter savings behaviour, shifting savings from one vehicle to another. Given the scale of the nation’s retirement savings shortfall, a shift into long-term retirement savings is justified. But we disagree with Sandler’s, and the Government’s, basic premise: incentives work.

22. In 2002 we surveyed moderate savers and employers to assess the effects of

current incentives on people’s propensity to save for retirement and the effects that any new incentives might have7. The results clearly showed that financial incentives have a major impact on encouraging people to save:

• 75% would save more if their employer contributed or increased

contributions to their pension; • 75% would be likely to save more if the government offered higher tax

relief on pension contributions; • 87% said they would save more with a government matched contribution;

and • 37% of respondents said that free, independent advice would make them

more likely to save more.

So, far from reducing tax incentives as some commentators have suggested, it is clear that the package of financial incentives available to pensions saving should be increased to encourage more people – particularly moderate savers such as those in our survey – to save more.

23. The efficacy of a fiscal incentive depends on who is incentivised. It is

absolutely apparent from our survey that employers play a pivotal role in encouraging workers to save. Our work shows that where an employer does not contribute to their employees’ pensions, scheme take-up is around 13%. But once an employer makes a contribution of around 5%, scheme take-up

7 What makes people save? ABI, October 2002. We surveyed 851 individuals (employees and self-employed people, all of whom were basic rate tax payers) and 451 employers with 5 or more employees. Research was conducted in September 2002 by IFF Research for the ABI.

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increases significantly, to 70%. Our proposals to encourage higher levels of retirement saving combine the dual benefits of fiscal incentives and the benefits of an employer contribution. In other words they seek to maximise the likelihood that someone will save more for retirement in a voluntary pensions system.

24. The ABI has proposed a Pension Contribution Tax Credit (PCTC) to

encourage more contributions to pension schemes. It works as follows:

• If the employer makes a 5% contribution to their employees’ pension arrangement: and

• achieves a 66% take-up rate; then • depending on size, the employer will receive a 1% or 0.5% reduction in

their employer National Insurance Contributions (NICs) to help off-set the costs of those contributions.

25. The PCTC is designed to be flexible. Bigger credits can be paid to smaller employers where a behavioural change is most needed – we propose a 1% NIC Credit for smaller employers and a 0.5% Credit for larger employers which will also help keep deadweight costs manageable. Moreover, because the PCTC applies to both DC and DB schemes, it could encourage more employers to retain their DB schemes. As more employers qualify for the PCTC, government would be able to increase the qualifying thresholds as a way not only of containing Exchequer costs but also as a way of raising retirement savings levels across the country. Based on some conservative assumptions, we estimate that the PCTC could cost as little as £900m but generate over £3bn in new savings, helping around 3m savers in the process. Costs could be reduced by, for example, making the incentive time-limited.

26. What is particularly encouraging is that both employers and employees favour

our PCTC proposal. Eighty per cent of employers in our survey said they thought the PCTC was a good idea. Of those employers in our survey currently contributing less than 5%, 36% would definitely or seriously consider raising their contribution levels to 5% to qualify for the PCTC. Of those employers already contributing at 5% or more, 54% said they would increase their contributions so that the net cost remained the same.

Recommendation 7: The Government must introduce a Pension Contribution Tax Credit to significantly increase contribution levels by both employers and employees. 401k plans 27. As the Green Paper suggests, 401k plans have had some success in

increasing pension coverage in the USA. Around 327,000 401k schemes have been set up since 1980. Around 42m Americans belong to such schemes, with around $1.7 trillion in funds under management. But their

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success should not be overstated. As in the UK, it has been difficult to encourage take-up of 401ks amongst small employers, despite the generous incentives available to employers for establishing and contributing to a scheme. This is in part due to the complex and burdensome nature of the ‘anti-discrimination’ legislation which employers must meet to qualify for the incentives. As a way of extending pension provision, new variants of the 401k have been introduced, including SIMPLE arrangements and a ‘Safeharbor 401k’, neither of which have yet proved to be attractive to employers. In common with stakeholder pensions, not only have 401k Plans failed to reach small employers, they have also failed to reach small savers. According to research conducted for the ABI by Oliver, Wyman and Co8 less than a quarter of families with incomes between $10,000-$24,999 have a 401k. Two decades after 401k plans were introduced, the bottom 25% of the US population has assets of less than $1,000. Our proposals for a PCTC adopt the 401k focus on employers but are intended to be much simpler to administer, thus more attractive to employers and in turn more effective.

28. The Government should guard against introducing one key feature of 401k

plans, namely giving scheme members the right to access some of their fund before retirement. Whilst it might be argued that this could act as an incentive to save, we believe the overall effects could be damaging. Despite the tax penalties, it is reported that many Americans do not repay loans from their 401k. With the average UK fund standing at just £23,000 we do not believe this practice should be imported – it would leave many who have a very small pension facing an even more uncertain retirement.

Recommendation 8: The effects of 401k plans have been overstated. Their key features should not be incorporated into the UK system. Compulsion 29. The Green Paper suggests that employers could be permitted to make

scheme membership a condition of employment. Employers can already opt employees into their schemes, and many choose to administer their schemes in this way. But in the absence of any significant incentives for employers to encourage scheme take-up, we do not believe it is likely that many employers will use the option to make scheme membership a condition of employment. Moreover, a confused state pension system with its heavy reliance on means-tested benefits means that for some employees, compulsory scheme membership may be the wrong option.

Recommendation 9: Giving employers the option to make scheme membership a condition of employment may be beneficial but, in the absence of a sound state pension system and compulsory employer

8 The Future Regulation of UK Savings and Investment (Appendicies) Oliver, Wyman and Co, September 2001.

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contributions, compulsory scheme membership could have some unintended consequences. The 1% world 30. As well as focussing on the demand side, government must also get the

supply side right. The Government is proposing to introduce a suite of simplified savings products, and we agree that there is scope for these, but only if the structure and price is right.

31. Experience to date with stakeholder pensions suggests that a 1% price cap

has done little to help spread the take-up of pensions to those on moderate incomes in the Government’s target income group. Those in the core market for stakeholder pensions (earning £10,000 - £20,000 pa) are contributing around half that of those in the £20,000 - £30,000 earnings group. It is only amongst higher earners (those earning over £30,000) that significant contributions are being made9. Price constraints, combined with a costly advice process has resulted in 11 million households being priced out of the advice market, creating and advice gap to run alongside the savings gap.

32. In short it is becoming uneconomic to serve smaller employers and those on

lower incomes. This runs counter to the Government’s philosophy – which we share – of getting more people to save more for retirement.

33. We must avoid repeating these mistakes and we are therefore pleased to

work with the Government to develop a suite of simple savings products that will allow pensions to be sold economically to all.

9 Stakeholder Pensions – closing the savings gap? ABI, November 2002.

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SIMPLIFICATION, REGULATION AND PROTECTING INVESTORS A simpler pensions system will encourage employers to offer schemes and individuals to join them. And we recognise that individuals must have confidence in their scheme and scheme provider. We are therefore pleased that the Government has recognised the need to rebuild public confidence in pensions. But this must strike the right balance between protecting scheme members whilst also allowing providers and employers to run schemes efficiently and cost effectively. We recommend:

• The New Kind of Regulator should have statutory objectives and take a risk-based approach to regulating pensions.

• Steps are taken to iron out remaining unevennesses between different types of schemes.

• Proposals for a Central Discontinuance Fund should not be introduced – there is no market for this product and it will not work.

Simplifying pensions 34. The complexity of the current pensions system is a major factor in dissuading

employers from establishing, and contributing to, pension schemes. ABI research10 shows that 47% of employers with a pension scheme for new employees who do not contribute to a pension would be more likely to do so if pension schemes were made easier to administer. We therefore welcome the proposals, contained in the Technical Annex to the Green Paper, to simplify the administration of pension schemes. Many of the proposals will help scheme administrators and help over the longer term to reduce costs.

35. Our detailed comments on the simplification proposals are set out in Annex A

to this document. 36. We are concerned, however, that the radical approach to simplification taken

by the Inland Revenue is not reflected in the proposed DWP reforms. Following the adoption of the DWP reforms, key differences will remain between different types of DC arrangements. These differences are unnecessary, unhelpful to scheme administrators and confusing to consumers.

Recommendation 10: The DWP should adopt a more radical approach to simplification to create one approach for DB schemes and one approach that can be applied to all DC schemes.

10 The Savings Gap – employers’ perspectives Continental Research for the ABI, September 2002.

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Regulation The New Kind of Regulator 37. The ABI welcomes the creation of the New Kind of Regulator (NKR) to

replace Opra. Opra has done a good job and has undoubtedly been influential in raising standards in occupational pension schemes. But its remit was narrowly focused and the time is now right for a more pro-active regulator that can focus on the most serious issues which have the biggest impact on scheme member security. We welcome, too, the decision not to subsume the NKR into the FSA – pensions warrant their own regulator. However, we do acknowledge that the NKR and the FSA will need to work closely together.

38. The NKR’s role and remit should be based on a small number of statutory

objectives which adopt a risk-based approach to regulation. These should be based on the Better Regulation Task Force’s principles of good regulation and include:

• Protecting scheme members in a way that applies a proportionate and

risk-based approach that secures compliance with the law through a mix of penalties (civil and criminal) and active assistance.

• Raising standards in scheme administration by helping those responsible

for running schemes to do their job effectively.

• Maintaining confidence in pensions as a way of saving for retirement.

• Remaining focused and accountable to Parliament, scheme members and those it regulates.

39. We also propose that the NKR should monitor progress against government

pension targets and advise on whether government policy will guarantee that the targets are met.

Recommendation 11: The NKR should adopt a risk-based approach to regulation which is reflected in a small number of focused, statutory objectives which are interpreted flexibly. Equity release 40. The ABI represents a number of the key players11 in the equity release

market who together have a substantial market share, particularly in the reversion market. We also represent companies that are currently considering entering the market. The ABI believes that there is potential for significant growth in the equity release market and that such growth would be

11 These include Norwich Union, Legal & General, AMP Retirement Services, GE Life, Britannic Retirement Solutions and Scottish Widows.

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in the interest of consumers12. Equity release could provide part of the solution to ensuring that people have bigger incomes in retirement.

41. In order to bring about growth in this market, a number of barriers which are

currently inhibiting both confidence in the current market (to extend demand) and the entry into the market of the “big players” (to extend supply), must be removed. One of these barriers is the lack of a comprehensive regulatory framework across the whole equity release market. Such a framework is necessary to build confidence in the market – for consumers, solicitors and advisers – as well as to encourage new market entrants.

42. Given that the FSA will regulate lifetime mortgage products from 2004, we

believe, along with many consumer groups and other trade bodies,13 that the solution lies in creating a level playing field and giving regulation of reversionary products to the FSA. Regulation of home reversion schemes by a body other than the FSA would cause additional complexity and perpetuate consumer and adviser confusion. From the consumer’s perspective all types of equity release are viewed as a single class of financial services product and accordingly need consistent regulation. Furthermore, the ‘risks’ inherent in both lifetime mortgages and reversion schemes are very similar and the vulnerability of the client base is exactly the same. FSA regulation would provide protection for the ageing consumer and give them recourse to a reliable compensation scheme and the Ombudsman.

43. Prior to regulation of the entire market by the FSA, the ABI supports

development of an interim regulatory framework, along the lines of a ‘Mortgage Code Compliance’ and we are keen to work with the Treasury and other interested parties to develop such a measure.

Recommendation 12: Reversionary home equity plans should be regulated by the FSA. Protecting scheme members 44. The Government is rightly placing considerable emphasis on protecting

scheme members. The need to do so has been made all the more urgent in the light of the large number of defined benefit occupational pension schemes that have closed over the past eighteen months where both the employer and the scheme is in deficit. Current market conditions would suggest that more such cases are likely to arise over the coming period. We support measures to protect scheme members in these circumstances. But proposals must strike the right balance between affordability and member protection. Above

12 The Council of Mortgage Lenders (CML) estimate the current size of the market to be about £1bn but that it could potentially be worth £50bn in ten years time. 13 For example, the CML, the Association of Independent Financial Advisers, the Consumers Association, the National Consumers Council, Help the Aged and Age Concern.

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all else, they must be workable in practice. We are far from convinced that some of the current proposals meet these tests.

Central Discontinuance Fund and an insurance scheme 45. We do not support proposals to introduce a Central Discontinuance Fund

(CDF) in which discontinued funds would be pooled and run as a closed scheme. A CDF run on a defined benefit basis as a closed scheme cannot work without a guarantor to cover any shortfall between the actual investment experience of the CDF and the investment assumptions made when the scheme’s assets were transferred to the CDF. The assumptions made regarding the longevity of the pensioners must also be guaranteed. The obvious guarantor would be the government. But we do not believe the Government would want to take on this role: taxpayers generally would be required to subsidise members of DB schemes and in some circumstances these subsidies could be significant. Neither do we believe that it would be appropriate to require other pension schemes to be the guarantor. Other schemes have no reason to act as guarantor with well-funded companies subsidising weaker ones. Moreover, as more employers move to DC arrangements, a declining number of employers will be left as guarantors.

46. The Green Paper suggests that the funding problem could be overcome by

requiring individuals to make a contribution to the insurance scheme. But this simply transfers the funding of the insurance. It does not overcome the fundamental, and in our view, fatal flaws in the scheme itself which provides no protection for scheme members against under-funding of the scheme by the sponsoring employer.

47. Commercial insurance is not a solution to the problem of under-funded

schemes with an insolvent employer and we do not believe that there is a market for such insurance. This is particularly the case under current market conditions. Post September 11 and recent stockmarket falls, the industry the industry is focusing on the risks it understands and would be unwilling to take on this new – and as yet unquantified – risk. A CDF or other insurance-based scheme would also fail to adequately spread risk because in an economic or market downturn, the demands on the CDF would increase considerably. Commercial providers are unlikely to be willing to insure a systemic risk. In addition, an insurance solution carries with it a significant risk of moral hazard – employers may deliberately under-fund their pensions in the knowledge that the benefits are protected by insurance.

48. It has been suggested that the US Pension Benefit Guarantee Corporation

(PBGC) could provide a possible model for a UK CDF. We do not agree. It is currently responsible for the pensions of 600,000 members of nearly 3,000 DB plans. But it guarantees “basic benefits” only and not all the benefits provided in a member’s plan. The benefits are subject to limits – for 2003 these are set at $3,665 a month (@£2,500) or $43,997 a year (@£30,000).

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These limits are further reduced for members who retire before age 65 or who elect for survivor benefits. Such limitations are clearly not what the government has in mind for the CDF. The PBGC’s funding requirements mean that currently plan sponsors are having to make massive cash injections to their pension plans at the same time as economic problems erode revenues and profits. The PBGC’s risk model calculates that there is a 1 in 20 chance that by 2011 it will be $22bn or more in deficit.

49. Unless the Government is prepared to act as guarantor of a CDF or make

significant contributions to a PBGC-type arrangement, we do not believe a CDF is practical or workable. Even then, the risks inherent in a PBGC-style arrangement will remain significant:

“…the existence of the pensions insurance program creates moral hazard, tempting management and labor at financially troubled companies to defer their pension obligations. This unfairly transfers the cost of under-funded pension plans to responsible companies and their workers. These financially strong companies at some point will have had enough, and will exit the defined benefit system, leaving only those which pose the greatest risk of claims.”14

Recommendation 13: The Government should abandon proposals to introduce a Central Discontinuance Fund, which will not work, and for which there is no market solution and should focus instead on proposals that will ensure schemes are properly funded. Minimum Funding Requirement 50. There can be no substitute for a properly funded defined benefit pension

scheme. Measures to tackle underfunding, including the introduction of a CDF and amending the priority order on wind-up, simply amount to ways of closing the stable door after the horse has bolted. The Government has opted for a scheme-specific funding standard. But the ABI has always believed this has inherent weaknesses and will do little to meet the Government’s aim of rebuilding confidence in pension schemes. In view of the significant increase in the number of closures of DB schemes in deficit, which could not have been envisaged when the new scheme-specific standard was first proposed, we believe it would now be prudent to move to a more robust statutory standard which recognises both the needs of sponsoring employers and the need to provide security for scheme members. This could provide an appropriate benchmark for funding the present value of pension liabilities going forward.

Recommendation 14: A new, more robust funding standard should be introduced which will help rebuild confidence in pension schemes. 14 Statement of Steven A Kandarian, Executive Director, PBGC before the Committee on Finance, US Senate, March 11 2003.

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51. The ABI supports the concept of transparency and disclosure and believes

there are advantages in improving awareness and understanding among scheme members and their representatives about how their pension scheme is funded. Any communication must be appropriate and cost effective, especially for small and medium-sized schemes. But we are sceptical that the majority of scheme members will understand the information contained in the Statement of Funding Principles, and research has now shown this to be the case.

52. Full information should, however, be made available automatically to

individual members and their representatives who register with the trustees for that purpose. This should ideally be yearly but in order to contain costs it may be appropriate to restrict the requirement by reference to significant events such as the issue of a new actuarial report, which implies at least every three years. All members should be notified that the full information is available on request but a request should not automatically be treated as registration to receive the full information every time it is produced. The notification might be accompanied by a very high level statement that the employer and trustees have agreed the employer’s contribution rate and contributions at that rate are being paid. The trustees would of course be free to supply as much information as they wish, including any statement the employer is prepared to make regarding ongoing support for the scheme.

53. Fuller automatic disclosure should be triggered by significant adverse events

including the emergence of a material deficiency at a valuation and when a recovery plan has to be put into place. The Statement of Funding Principles may well define that event but it should otherwise be up to the trustees to decide when full disclosure is appropriate, perhaps backed by a specific requirement if the funding position falls below 90%. The concept of providing information “within a reasonable period” is appropriate but the NKR should give some guidance as to what period can be deemed reasonable. The message from the regulator should be that any delay that would be excessive in normal circumstances must be justified by special circumstances. Guidance might be at two levels with more specific indicators given to advisers and other service providers.

54. Member education would be aided by the production of some short

explanatory leaflets. It would seem appropriate for these to be produced by the New Kind of Regulator. The leaflets would be an optional supplement to trustee education and should be particularly cost effective for trustees of small and medium-sized schemes.

Recommendation 15: Scheme information should be available to members and their representatives who register with the trustees for this purpose.

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The regulator should assist in developing a greater understanding of scheme funding through the provision of literature. Winding up – solvent employers 55. The Technical Annex asks for views on whether meeting the full buy-out cost

should be a requirement for solvent employers who wind-up a defined benefit scheme. One major drawback of a buy-out standard is that the buy-out market is very small and specialised with scheme-specific terms being offered by those insurers who are prepared to quote on the open market. Less than 1% of current total DB liabilities could be insured in any one year. The largest schemes could never be placed, even if spread around the market. The effect of this is that scheme actuaries can only make rough estimates in advance as to whether a scheme will have enough assets to cover buy-out costs, which means that reliance can only be placed on the broadest of opinions e.g. well below or well above the level required.

56. The suggested imposition of the full buy-out costs on solvent employers

would create a contingent liability for all employers running DB schemes. The amount of this liability would fluctuate and in current conditions would exceed the FRS17 deficit for most schemes. Implementation of this requirement might be thought of as locking employers into their DB schemes. It is more likely to drive them to limit their liabilities as quickly as possible which would trigger closure of many more schemes to new entrants. The main reason for the fluctuation in the potential liability is the mismatch between equity asset values and bond based buy-out costs i.e. the same issue that is causing so much current concern about FRS17. Much current publicity is being given to the idea that schemes should switch their assets to bonds to reduce FRS17 problems and provide greater security for members. This may well be the appropriate strategy for some schemes but is manifestly impracticable for all schemes given the current weight of pension scheme assets in equities. Any significant short-term movement in this direction by even a relatively small proportion of schemes would probably destabilise the equity and bond markets to such an extent that the objectives of the schemes concerned would be negated. There would also be a major impact on individual savings vehicles with DC pensions being particularly hard hit because of the double impact on equity returns and annuity rates. Switching assets to bonds to mitigate a potential buy-out liability would not therefore be an option for schemes in general if the full buy-out cost requirement for solvent employers was adopted. Indeed, it could render some solvent employers potentially insolvent in current conditions. A full buy-out standard is therefore unrealistic.

57. However, a partial buy-out standard represents a more practical means of

determining the debt on a solvent employer when a DB scheme is wound up. It provides full protection for those who need it and a benefit for younger members that is commensurate with the ‘pension promise’ being withdrawn by the employer. This does not mean that there will be no potential liability for

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the sponsoring employer of a properly funded scheme but it will be much less than the full buy-out liability, especially for an employer with a younger workforce.

Recommendation 16: A partial buy-out basis should be adopted in respect of solvent employers who wind up their defined benefit occupational pension schemes.

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INFORMING CONSUMERS It is essential that more people know more about their pensions. But the effects of more consumer education and information should not be over-estimated. Unless combined with additional incentives to save, the effects of simply telling people more about their pension rights will be limited. We recommend:

• A national strategy to promote the need to save for retirement and the risks of not saving.

• A serious and well-funded government information campaign warning people of the risks of not saving for retirement.

• Giving employers a central role in extending information and generic advice on retirement savings by allowing them to promote the schemes they run.

• A co-ordinated approach to the development of pension forecasting initiatives.

58. The ABI agrees that more people should know more about their need to save

for retirement and – more importantly – the risks of not saving. Recent ABI research15 showed that half the population know little or nothing about pensions. So we support the Government’s plans to ensure that people have better and more focused information about their retirement benefits. But access to improved information is just one element in helping people to save for an adequate income in old age. By itself, information will not generate a step change in savings behaviour – creating a more financially literate and aware body of consumers is inevitably a slow burn. Financial incentives on the other hand have a significant and more immediate impact on an individual’s propensity to save for retirement and must therefore be the centrepiece around which an information and advice campaign is built.

59. The Government is right to identify a spectrum of activities which can help

people know more about pensions, ranging from raising levels of financial literacy, through education initiatives, to consumer information and advice (both face to face and generic). We support the government’s intention to shift activities from the provision of consumer financial education (important though that is) to the provision of financial information and generic advice that will prompt people to take action.

60. As with its pensions policy more generally, a clear direction for government

policy on pensions education, information and advice is needed. There are a number of organisations and government departments active in this field, each doing excellent work in their own right. But there is no overall strategy, direction or co-ordination. Ron Sandler has proposed that the FSA should be

15 What makes people save? ABI, November 2002.

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given enhanced powers with a ring-fenced budget. We agree the need for the creation of such a function at arm’s length from the FSA’s regulatory functions. It’s mission would be clear: to tell people about the need to save for retirement and the risks of not saving. In carrying out this function it is vital that the FSA works closely with others already active in this field including the savings industry.

Recommendation 17: A national strategy for increasing understanding about pensions is needed that promotes saving and the risks of not saving for retirement. Helping people plan for retirement 61. The ABI is leading the way in helping people plan for their retirement. Our

web-based Pension Calculator16, developed and launched jointly with the FSA, shows consumers the benefits of saving (as well as the benefits of saving and working longer). We have teamed up with a number of organisations to provide access to the Calculator on as wide a basis as possible. Since the Calculator was launched in November 2002, over 70,000 people have visited the site. We are therefore delighted that the DWP plans to use the Calculator as the basis for its web-based retirement planning tool.

Telephone helpline 62. Currently there are a number of helplines which perform valuable functions in

disseminating information about saving for retirement. However, from a consumer’s perspective the multiplicity of helplines may actually act as a barrier to people seeking information, as they may not know where to turn, or may find that they are referred from one helpline to another. We therefore support wholeheartedly the proposals for a nationwide telephone and website information service that would act as a first port of call for people who had questions about any aspect of saving for retirement. As one of the main sponsors of the ‘Pension Power for You’ helpline run by the TUC in 1999, we are pleased that the Government plans to build upon the success of this pilot.

63. This service should be set up and run by the new independent pensions

education body to ensure overall co-ordination with other initiatives aimed at raising awareness. It should give answers to basic questions, access to general information and help callers (or surfers) in navigating their way to more specialist help and advice. We would suggest that the telephone and website information service should have the specific goal of encouraging take-up from specific groups, especially those who are under-pensioned (e.g. ethnic minorities and women). The helpline should be independent and impartial in order that it is viewed as a trusted source of information. Funding should therefore come from the Government. It is not appropriate for schemes or providers to pay for this through scheme levies. Providers are being

16 www.pensioncalculator.org.uk

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http://www.pensioncalculator.org.uk/


required to operate within a charge-capped environment and cannot be expected to fund public helplines.

Recommendation 18: The Government should take forward proposals for a one-stop-shop telephone helpline that can provide basic help, information and generic advice to consumers. Government advertising campaign 64. Previously, we welcomed the Government awareness campaign and we are

pleased to learn that its initial impact on public attitudes has been encouraging. We agree that the time is now right to shift the focus to providing information that will prompt people to take action.

65. To do this successfully, a hard-hitting advertising campaign is required which

should focus specifically on informing the general public about the risks of not saving for retirement. In considering how best to implement this strategy, we would suggest that Government should: • Consider the experience of other government departments’ advertising

campaigns, such as the Department for Education and Skills (DfES) campaign to promote financial literacy, or the drink driving campaigns.

• Consult financial services companies which have vast experience in disseminating messages about finance. Collaboration with the industry would also enable companies to co-ordinate their advertising campaigns with those of Government, and in doing so reinforce key messages about the need to save for retirement.

• Look at best practice from abroad. This should include examination of the ‘Take Action’ campaign run by the Office of the Retirement Commissioner in New Zealand. This campaign was designed to bridge the gap between awareness and actions on financial planning and had a very positive effect, leading to 59% of the target population (those earning between NZ $30-40,000 in the 25-55 age range) taking some action to provide for their retirement in the two months following the campaign.17

Recommendation 19: A hard-hitting government funded advertising campaign is needed to promote the need to save and the risks of not saving. Pension forecasting 66. We concur with Government on the importance of ensuring that people of

working age receive regular information to help them take personal responsibility and plan for their financial future. The industry has demonstrated its commitment to providing consumers with easily understandable information through:

17 See ‘Summary of the Take action Campaign’, Report prepared for Office of the Retirement Commissioner, New Zealand, November 1998.

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• developing and distributing Statutory Money Purchase Illustrations (SMPIs) to 22 million customers from 6 April 2003;

• the development and maintenance of the Pension Calculator; and • the Raising Standards initiative.

67. The development of more comprehensive statements is, in our view, a

welcome step. However, while we welcome the aim of empowering people by providing them with individualised forecasts of their entitlements, there appears to be a distinct lack of clarity and co-ordination around the aims of the various forecasting initiatives. In addition to annual benefit statements and SMPIs, the Green Paper discusses proposals for combined pension forecasts (state pension information plus the forecast from an individual’s current occupational or private pension scheme) and an online retirement planner, which aims to enable people to view their total projected pension income, estimate the income they might need in retirement and calculate any savings shortfall. It is not clear whether this differs from the ‘composite pension forecast’, which has been mooted previously by the Government.

Recommendation 20: There must be a clear analysis of the different forecasting initiatives. Their overall aims and timescales must be clarified and they must each add value. 68. We would argue strongly that it should not be made compulsory to send out

Combined Pension Forecasts (CPFs). There are a number of very robust reasons for this:

• Almost all providers operate multiple IT systems for different versions of

specific products, often as the result of take-overs and mergers. The introduction of compulsory CPFs would therefore be very difficult to implement. The process of extracting data from each system may be different and old systems may not even hold all the data needed to process CPFs – for example Section 226 business was not required to record or hold National Insurance numbers.

• Many small employer schemes may not have the resource, expertise or money to comply with benefit statement production. Proceeding on a compulsory basis may, in some cases, result in closure of schemes to avoid the requirements to issue CPFs.

• The proposals for CPFs need to be considered in the context of the large number of other Government initiatives and regulatory changes that the insurance industry is currently having to comply with, such as SMPIs and changes to the disclosure regime.

69. It should be noted that even those firms which took part in the successful

pilots for CPFs and who recognise the merits of issuing CPFs maintain that any extension of their delivery must be undertaken by voluntary means. We

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acknowledge the need to maximise take-up of CPFs. To do this Government must:

• make explicit the aims and objectives of the CPF and its interaction with

other forecasting initiatives; • make clear the benefits of providing the service to pension providers,

including the publication of an analysis of the pilots; • demonstrate the simple processes involved in gaining scheme members’

consent to issue a CPF, and in transferring and receiving data from DWP; and

• detail the robust IT systems that DWP has in place to cope with large volumes of requests for State pension forecasts.

The role of employers 70. All of Britain’s under-savers are of working age and in employment, according

to Government data. Using the workplace to deliver financial information means that large numbers of people can be reached in a cost-effective way. We are therefore pleased that the government shares our view that employers have a pivotal role to play in ensuring that people are properly informed about their need to save for retirement.

71. We are therefore pleased that the Government has established an Employer

Taskforce to promote employers’ role in pension provision. However, we are concerned that there is no role for the savings industry on the Taskforce. Many employers – especially small and medium sized employers whose behaviour the government most needs to change – rely on their financial service providers and IFAs for help and information. It is essential, therefore, that the industry is allowed to play an active part in the Taskforce. We have considerable expertise in this area which we are keen to share. The inclusion of the savings industry on the Taskforce would also help make a reality of the government’s, and our, shared objectives of creating a vibrant pensions partnership.

Recommendation 21: The Employer Taskforce is a welcome initiative but its membership should be expanded to include representatives from the savings industry who have a valuable contribution to make. 72. Stakeholder pensions have solidified the link between employment and

pensions for the vast majority. But that link has yet to work successfully. Over 90% of employers required by law to provide access to a stakeholder pension scheme have done so. But 90% of employer-designated schemes are ‘empty boxes’ and only 9% enjoy an employer contribution18. To turn this scenario around, employers must be allowed – indeed encouraged – to do more. Encouragingly, ABI research19 shows that with the right prompts, employers

18 Stakeholder Pensions – closing the savings gap? ABI, November 2002. 19 Workplace advice – a discussion document, ABI, April 2002.

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are willing to make financial advice and information available to their employees. And 70% of employees would be happy to take up advice and information if it was offered through the workplace. So the Government’s proposals to encourage employers to inform current and prospective employees about the pension scheme are welcome. In particular, we welcome the proposed pension information pack for employers. Our research showed that 43% of small employers would be more likely to provide information to their employees if such an information pack was available. The industry is keen to participate in its development.

73. But the effects of the pension information pack and the other measures

proposed in the Green Paper, such as providing pensions information to current and prospective employees, will be limited if employers are not also allowed to actively promote the schemes they offer, whether defined benefit or defined contribution. So the Government and regulators should give employers explicit encouragement to promote the schemes they offer. This will involve removing employers from the financial promotions regulations that currently prevent employers with defined contribution schemes from promoting the schemes they offer. Our proposals would also help to create a level playing field between DB and DC schemes.

74. Given the complexity of the current state pension system and the MIG, we

suggest that a sensible starting place would be to allow employers with DC schemes who made an unconditional or matched contribution to be able actively to promote scheme membership to their employees.

75. Employers will clearly need help and advice to do this. Current guidance from

the FSA is inadequate and new government guidance is needed. Initiatives such as the information pack could be expanded to provide employers with the ‘tool kit’ to promote the benefits of scheme membership.

Recommendation 22: Employers should be allowed to promote the schemes they offer. A sensible starting place would be to allow employers who make an unconditional or matched contribution actively to promote scheme membership. 76. We welcome the Government’s proposal to require employers who do not

contribute to a pension arrangement to take action to promote saving for retirement. But the Government must recognise the limitations of some of its proposals, in particular that in a charge-capped environment, pension providers will be extremely reluctant to undertake annual presentations etc to staff unless the employer covers the provider’s costs. Our Workplace Advice Credit could provide a model for the pilot proposed in the Green Paper.

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Recommendation 23: Employers who do not provide, or do not contribute to, a pension scheme should be required to take steps to make information on the importance of saving for retirement available to their employees. A Workplace Advice Credit 77. Helpful though the Government’s initiatives are, a real change will only come

about if employers are incentivised to facilitate the provision of information and advice to their employees. That is why the ABI has developed a proposal for a Workplace Advice Credit (WAC) to help employers off-set the costs of facilitating financial advice. Under our proposals, employers of small employees (less than 500) would receive a two hour ‘financial healthcheck’ every five years. Employers would use the WAC to reclaim 50% of the cost of advice. Over time the Credit could help bring advice to around 4 million workers and generate new savings of around £2.1 billion. Exchequer costs are modest – around £100m a year. Our research shows that 40% of small employers would act if such a Credit was introduced.

Recommendation 24: A Workplace Advice Credit should be introduced to provide an incentive to small employers to promote the benefits of saving for retirement.

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CREATING A SIMPLE TAX FRAMEWORK The ABI welcomes the Inland Revenue’s approach to simplifying pensions tax arrangements by sweeping away 8 separate tax regimes and replacing them with a single regime. But it is important that as well as being simple the new regime is as fair as possible. The measures we propose will ensure that incentives to save through a pension are retained at all income levels. We recommend:

• Implementation no earlier than April 2005 to permit providers to make the necessary systems and administrative changes.

• The lifetime limit should be indexed to take account of increases in earnings, longevity and investment conditions.

• Headroom to be allowed for those with pensions of more than or approaching £1.4m on ‘A’ Day to avoid the damaging retrospective effects of the tax changes, together with a neutral recovery charge.

• Simplification of the proposals for retirement benefits which are overly complex, particularly regarding the treatment of death benefits.

Simple tax rules for all 78. The ABI welcomes the proposed simplification of pensions taxation

arrangements. The introduction of a single tax regime for all pensions will sweep away the present complexities leaving individuals and employers in a better position to understand pensions. This will remove an important disincentive to saving.

79. We agree with the Government that the reforms proposed should:

• allow many people to save more, if they can afford to; • make it easier for employers to set up and run pension schemes; • have an impact on financial advice, as advisers will no longer have to

consider the tax differences between different schemes; and • introduce scope for flexibility and innovation in scheme design.

80. We believe that a lifetime limit is workable, subject to the introduction of some crucial safeguards to ensure that the lifetime limit works effectively and that incentives to save in a pension are retained at all income levels.

81. One of the most important aspects of the proposed lifetime limit regime is its

focus on the majority who do not save enough for retirement. The consultation paper makes the point very well – “over 99 per cent of people saving in pensions will be able to save more in pension form with tax relief if they can afford it”20. We think this is a crucial statement and it will be extremely

20 Simplifying the taxation of pensions: increasing choice and flexibility for all, HMT and Inland Revenue, December 2002, p 17

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important to ensure its continued veracity. The following measures are necessary in order to achieve this goal:

• The lifetime limit (and annual limit, if retained) must be regularly indexed.

We strongly recommend that earnings indexation is adopted. If this is not an acceptable index, the government must consider an alternative, for example GDP. Failure to index the lifetime and annual contribution limits will mean that increasing numbers of people will be affected by limits that were intended only to bite on the top 1% of scheme members. Even more people than are increasingly caught by the RPI indexation of current earnings cap will be affected because the lifetime limit effectively acts as a cap/tax on both earnings and investment growth. Those who will be caught by the limit in years to come, will effectively be caught by it immediately as they have to plan their pension contribution from now. If the limit is only increased in line with prices, the Government will be giving out the message that it wishes to reduce the role of private pension saving in the long term.

• As people live longer and longer, the amount of income which can be

purchased with the lifetime limit will reduce. The lifetime limit must therefore also be regularly (perhaps annually) reviewed to take account of improvements in longevity and changes in investment conditions. This will ensure future generations of pensioners can buy the same level of pension as earlier generations.

• The overall policy objective behind the lifetime limit must be stated in

legislation so that any reviews can take account of it. Recommendation 25: The lifetime and annual contribution limits should be indexed annually in line with earnings or some other appropriate index to ensure that 99% of people continue to benefit from the proposed changes.

Recommendation 26: The lifetime limit should also be reviewed periodically to take account of longevity improvements and investment conditions, to ensure that the limit retains its purchasing power. 82. It is also essential that the lifetime limit is robust from the outset. According to

the consultation paper, the figure of £1.4 million was chosen because it is “broadly equivalent to a maximum pension under the current occupational pension rules for a man aged 60 drawing an indexed pension and providing a surviving spouse’s pension.” However, improving longevity and falling interest rates have resulted in annuity rates in the market which would not support the targeted level of income. To clarify:

• a 60 year old man in an occupational pension scheme could currently

receive a maximum income of 2/3 of £97,200 (the current cap). This

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amounts to £64,800 income per year (indexed and with a spouse’s pension). The consultation paper envisages that it would cost £1.4 million for the same 60 year old man to buy an annuity paying £64,800 per year (indexed and with a spouse’s pension).

83. In fact under current annuity rates, £1.4 million would buy a pension of

£55,000 per year for a 60 year-old man (with a spouse’s pension and indexation) – £9,000 a year less than the government’s intended maximum. This is the top conventional annuity rate available for such a person on the market. The income would be even less if purchased at a younger age. Taking account of current market conditions, we therefore recommend that a more realistic starting point for the lifetime limit would be £1.8 million.

Recommendation 27: The starting point for the lifetime limit should be £1.8m. 84. We welcome the proposal that those who wish to save more than the lifetime

limit should enjoy the flexibility to do so, but without tax relief. A recovery charge which would roughly neutralise the tax relief is proposed. This approach is particularly sensible in light of the adoption of a fund rather than a contribution limit. But the proposed recovery charge of 33%, combined with compulsion to take the excess as a taxed lump sum and taxed income, seems far too high to us. We understand that the recovery charge has been set at 33% to recoup the tax advantages which would arise on monies invested for 15 years with tax relief. This charge is therefore excessive in circumstances where the lifetime limit is breached shortly before retirement. Our response to the consultation paper ‘Simplifying the taxation of pensions: increasing choice and flexibility for all’ sets out some options for a fairer recovery charge and we strongly recommend that one of these is adopted. One option, for example, would involve a lower charge on funds just over the limit and a higher charge on funds in excess of, say, £2m.

Recommendation 28: The current recovery charge is too high to apply to all and should be replaced with a fairer charge. 85. The Government proposes requiring those with a fund greater than £1.4m on

‘A Day’ to register that fund. This will then become their new lifetime limit and will be up-rated in the same way as the lifetime limit. So, whilst the lifetime limit will increase only in line with prices under current proposals, the fund will increase in line with investment growth (7% on current FSA projections). Consequently, the fund value will exceed the new lifetime limit at vesting and a recovery charge will be applied, even though no new contributions have been made. This does not adequately protect the benefits that have built up prior to ‘A Day’ which is the Government’s aim. Some additional transitional measures are therefore needed to ameliorate the retrospective effects of the

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lifetime limit and help protect the pensions already accrued of those with large funds on ‘A Day’.

86. A practical way to give effect to this would be to allow sufficient headroom

above the new lifetime limit for investment growth (DC schemes) and a reasonable salary increase (in the case of DB schemes). The headroom could be in the region of 10-20%. The headroom limits would cease to apply if the member transferred to another scheme. Alternatively, the recovery charge could be dis-applied in respect of investment growth (for DC schemes) and salary growth to a reasonable level (for DB schemes) provided no new contributions were made or additional years of pensionable service accrued. Again, this transitional easement would cease on transfer to ensure simplicity.

Recommendation 29: Headroom should be allowed on funds greater than and approaching £1.4m on ‘A Day’ or the recovery charge dis-applied on salary or investment growth to provide for transitional arrangements. 87. An implementation date of April 2004 is not viable. The changes will require

major systems changes across a number of legacy systems in addition to the many other changes which will require IT resource around that time (e.g. the introduction of ‘Sandler products’ polarization reforms and the new disclosure regime). Providers will require one year from the date that finalised legislation is available in order to implement the new regime. At the very earliest, this will mean April 2005.

Recommendation 30: ‘A’ Day should be 12 months from the date the final legislation is passed to allow providers time to make the necessary systems and administrative changes. A simple benefits regime 88. The proposed treatment of post-vesting death benefits is not coherent and will

confuse consumers. Rather than simplifying benefits and streamlining the advice process, as the accumulation phase proposals do, these proposals increase complication and the amount of advice needed. Far from increasing consumer choice as the Government aims to do, the current proposals are likely to confuse consumers and reduce choice.

Lifetime annuities 89. The difference in post retirement death benefits permitted before and after

age 75 in respect of lifetime annuities is very complicated. In particular, the introduction of value protection until age 75 and the retention of the 10-year guarantee option is likely to confuse consumers. It will be difficult for them to compare the two, particularly as age will be a factor in determining which is the best option for a particular person. This will lead to a need for more advice, which experience shows consumers are not always willing to take or

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able to afford21. Our proposals for a simpler death benefit regime are set out in our response to ‘Simplifying the taxation of pensions: increasing choice and flexibility’ and we strongly recommend these to the Government.

Income drawdown and limited period annuities 90. It is similarly proposed that value protection until age 75 is introduced for

income drawdown. However, while value protection is suited to a lifetime annuity where there is generally no separate, identifiable, fund it does not fit well with the concept of drawdown or limited period annuities (LPAs) where a separate fund exists. Similarly retention of money after death (either post-75 or pre-75 if value protection is not chosen and there is no-one to whom to pay a spouse’s/ dependent’s pension) fits well with the concept of a lifetime annuity due to the cross-subsidy feature but not with income drawdown or LPAs where there is no cross-subsidy. Again, our proposals for a simpler death benefit regime are set out in our full response to ‘Simplifying the taxation of pensions: increasing choice and flexibility’.

91. We are concerned that LPAs will add unnecessary complexity to the ‘at

retirement’ market. We believe that the same result can be achieved under income drawdown. Two options – lifetime annuities and simplified drawdown – would be easier for consumers to understand.

Recommendation 31: It is essential that the Government pays further attention to simplifying proposals for post-retirement death benefits. Recommendation 32: LPAs should not be introduced as they will add complexity to the market.

21 Annuities – the consumer experience, a research report by Julie Stark, ABI, October 2002.

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EXTENDING OPPORTUNITIES FOR OLDER WORKERS We support the Government’s proposals to introduce measures to extend opportunities for older workers. But the effects of these changes should not be over-stated. We recommend:

• Proposals to increase increments for state pension deferral should be introduced by April 2005.

Extending opportunities for older workers 92. The ABI welcomes the Government’s focus on enabling and encouraging

older people to work longer where they choose to do so. This section on the Green Paper recognises, as others do not, that effective reform requires consideration of state benefits as well as the rules relating to private pensions.

93. Longer working lives could help people improve the adequacy of their

retirement incomes, but only if people are incentivised to save throughout their working life. Otherwise, deferral of retirement could simply result in a corresponding deferral of starting to save.

Proposal to increase rates of increments for deferring state pension 94. We support the proposal to bring forward the date for increasing increments

for deferring state pensions. Increments which more fairly reflect the benefits foregone could play a part in a broader strategy for encouraging people to retire later but their effect should not be overstated. Most people underestimate their own life expectancy and will not readily trade cash today for the promise of more cash tomorrow. The proposed lump sum payment could prove a more valuable incentive.

95. We are concerned, however, that the increments may represent less than fair

value for pensioners who receive the Pension Credit. At present, increments for deferral count as income for the purposes of calculating entitlement to the Credit. This means that each additional £1 a pensioner receives for deferring their retirement will result in a 40p reduction in their Pension Credit payment, effectively removing the gain from deferring. This anomaly could be addressed by a simple amendment to the Pension Credit legislation, removing increments for deferral from the definition of income.

96. We see no reason why the Government cannot introduce the increased rates

sooner than 2006. Pension providers are being asked to make the changes necessary for ‘A’ day by April 2004. There is no reason why the Government cannot make changes to the state system with the same urgency.

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Recommendation 33: It is unlikely that bigger increments will have a significant effect on the numbers seeking to defer. Recommendation 34: Rules on increasing increments for deferral should be introduced by April 2005. State pension age 97. The ABI supports the Government’s intention to maintain state pension age at

65. Increases to state pension age would affect the poorest pensioners (who have the shortest life expectancy) disproportionately and would do little, if anything, to address the real problem of effective retirement before state pension age.

Tax changes to encourage flexible retirement 98. The ABI supports measures to encourage more flexible patterns of retirement.

We welcome the proposal to enable people to continue working for the sponsoring employer while drawing their occupational pension.

99. Raising the age limit from which benefits can be taken from 50 to 55 seems at

odds with encouraging flexibility in retirement. Where people have accumulated sufficient rights to retire at the age of 50 they should, as now, be free to do so.

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WOMEN AND PENSIONS As a group, women are underpensioned. We therefore welcome the acknowledgement in the Green Paper to do more to help women save for retirement. We recommend:

• Changes to the state pension system to allow women to buy back missing contribution years.

• A government-backed awareness and information campaign targeted at women.

• Incentives that will help women save in a pension. • The Government does not take steps to introduce unisex annuity rates.

100. We agree with the Government’s analysis of the reasons behind the

under-provision of both state and private pension provision as regards women. Many of the Government’s proposed activities in this area, such as the telephone helpline, lend themselves to being targeted at encouraging women to save more for retirement and are likely to have more impact if combined with the additional awareness raising activities we propose. And as more women enter the labour market, it will be extremely important to engage employers in helping their female employees take-up the benefits of scheme membership. If employers can be encouraged to provide advice in the workplace about their pension scheme this is likely to have the greatest impact on women’s awareness. The ABI’s proposals for a Workplace Advice Credit (set out in paragraph 77 of this response) would help incentivise employers to facilitate the provision of information and advice to their workforce. Again, as our Credit is targeted on small employers, women are likely to be the main beneficiaries.

101. But more information alone will not be sufficient to help women to provide

adequately for old age. Interrupted working lives and lower earnings means that affordability remains a key issue. Our proposed Pension Contribution Tax Credit would benefit women in particular as they are more likely than men to work for smaller employers who are least likely to make a contribution to their pension.

102. Private pensions will not, by themselves, deliver adequate retirement

incomes for women. The state has a very important role to play. Reform of the state pension system along the lines outlined in this paper would increase the state pension rights of lower earners (disproportionately women) whilst giving a clear incentive to join an occupational scheme and fully benefit from an employer contribution.

103. The state pension could be further improved to cater adequately for

women’s employment patterns by allowing older women to buy back National

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Insurance contributions and thereby build up rights to a full basic state pension. This would benefit women who start out their working lives in lower paid jobs but have bigger salaries towards the end of their careers.

Recommendation 35: Employer-focused financial incentives will disproportionately benefit women and encourage them to make provision for old age. But the state has a role to play to – it must be adapted to cater for women’s employment patterns. Unisex annuity rates 104. We do not believe that unisex annuity rates are the answer to tackling

female poverty in retirement and we welcome the Government’s very sensible approach in concluding that unisex annuity rates would be detrimental to the market and should not be required.

105. Sex-based rates do not result in a worse deal for women because women

should (based on life expectancy) ultimately receive the same total amount of income as men of the same age. To use a simple example: if a woman aged 65 has a life expectancy of 19 years and retires with a pension fund of £10,000, she might receive around £600 a year from an annuity. By the time she dies 19 years later she will have received (19 X £600) £11,400 in total from her annuity. If a man at age 65 with a life expectancy of 16 years buys an annuity with a pension fund of £10,000 he will receive more income per annum than the woman - £712.50 in this example – but it will only be paid out for 16 years so in total he will have received (16 X £712.50) £11,400, the same amount of total income as the woman.

106. The main impact of introducing unisex annuity rates, as the Green Paper

recognises, would be to worsen annuity rates for men (i.e. reduce their income in retirement) and improve rates for women (i.e. increase their income in retirement). Most annuities currently bought are single life on the man so this would result in people generally being worse off in retirement. Their introduction would also be likely to result in an increase in margins by annuity providers to cover uncertainty about this new business risk. This would result in a worsening of annuity rates generally. In light of the Government’s stated aim in the Consultation Paper ‘Modernising Annuities’ on annuities of increasing the level of retirement income that people can expect to gain through an annuity, this would not be desirable.

107. The increasing sophistication in rating factors applied to annuities makes

the case for unisex annuity rates less compelling than in the past. Many providers now take into account other factors such as occupation, state of health, geographic location and variations in life expectancy between different age cohorts when determining annuity rates. A unisex annuity rate would be inconsistent with these market developments as it would be unfair to

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differentiate on the basis of some factors which affect mortality but not on the basis of others.

108. It is also important to remember that requiring providers to offer only

unisex annuity rates could set a precedent for other types of health and life insurance. With some of these products, taking account of sex produces a benefit for women over men e.g. life insurance. Incentives aimed at increasing women’s saving for retirement are likely to have a far more effective impact that unisex annuities, this can be demonstrated by means of an example:

A woman aged 60 retires with a pension fund of £10,000 (43% of annuities are purchased with £10,000 or less and women are more likely to be in this category than men). She purchases a single life, inflation linked annuity without a guarantee. The best rate she can get on the market pays £37 per month. If she were to purchase the same annuity at a unisex rate she could get an extra £3 per month, £40 i.e. a 7% increase. However, if she were instead to save an extra £10 per month from age 25, she could buy an annuity on the same basis (sex-based) and receive £92 per month – an increase of 145%.

Recommendation 36: Unisex annuity rates are not the answer to improving the pension rights of women. Measures such as financial incentives will have a bigger and more immediate impact.

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CONCLUSION Recommendation 1: The Government must ensure a better future for tomorrow’s pensioners and tomorrow’s taxpayers by reforming the state framework now. Recommendation 2: A revised flat rate State Second Pension combined with earnings-related contracting out rebates will achieve the dual objectives of improving the pension rights of low earners and providing incentives to save in a private pension. Recommendation 3: The self-employed should be brought into the State Second Pension or be required to take out a private second alternative. Recommendation 4: Clear government targets must be set which, within five years, significantly reduce the levels of under-saving and increase levels of employer contributions. Recommendation 5: The NKR should monitor the Government’s success at meeting the pensions targets. Alternatively, the Pensions Commission could take on this role, but only if its membership is truly representative of savers and the savings industry. Recommendation 6: The Government must introduce a package of workable and affordable incentives to generate higher levels of pension saving or abandon the voluntary approach in favour of compulsion. Recommendation 7: The Government must introduce a Pension Contribution Tax Credit to significantly increase contribution levels by both employers and employees. Recommendation 8: The effects of 401k plans have been overstated. Their key features should not be incorporated into the UK system. Recommendation 9: Giving employers the option to make scheme membership a condition of employment may be beneficial but, in the absence of a sound state pension system and compulsory employer contributions, compulsory scheme membership could have some unintended consequences. Recommendation 10: The DWP should adopt a more radical approach to simplification to create one approach for DB schemes and one approach that can be applied to all DC schemes.

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Recommendation 11: The NKR should adopt a risk-based approach to regulation which is reflected in a small number of focused, statutory objectives which are interpreted flexibly. Recommendation 12: Reversionary home equity plans should be regulated by the FSA. Recommendation 13: The Government should abandon proposals to introduce a Central Discontinuance Fund, which will not work, and for which there is no market solution and should focus instead on proposals that will ensure schemes are properly funded. Recommendation 14: A new, more robust funding standard should be introduced which will help rebuild confidence in pension schemes. Recommendation 15: Scheme information should be available to members and their representatives who register with the trustees for this purpose. The regulator should assist in developing a greater understanding of scheme funding through the provision of literature. Recommendation 16: A partial buy-out basis should be adopted in respect of solvent employers who wind up their defined benefit occupational pension schemes. Recommendation 17: A national strategy for increasing understanding about pensions is needed that promotes saving and the risks of not saving for retirement. Recommendation 18: The Government should take forward proposals for a one-stop-shop telephone helpline that can provide basic help, information and generic advice to consumers. Recommendation 19: A hard-hitting government funded advertising campaign is needed to promote the need to save and the risks of not saving. Recommendation 20: There must be a clear analysis of the different forecasting initiatives. Their overall aims and timescales must be clarified and they must each add value. Recommendation 21: The Employer Taskforce is a welcome initiative but its membership should be expanded to include representatives from the savings industry who have a valuable contribution to make. Recommendation 22: Employers should be allowed to promote the schemes they offer. A sensible starting place would be to allow employers

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who make an unconditional or matched contribution actively to promote scheme membership. Recommendation 23: Employers who do not provide, or do not contribute to, a pension scheme should be required to take steps to make information on the importance of saving for retirement available to their employees. Recommendation 24: A Workplace Advice Credit should be introduced to provide an incentive to small employers to promote the benefits of saving for retirement. Recommendation 25: The lifetime and annual contribution limits should be indexed annually in line with earnings or some other appropriate index to ensure that 99% of people continue to benefit from the proposed changes.

Recommendation 26: The lifetime limit should also be reviewed periodically to take account of longevity improvements and investment conditions, to ensure that the limit retains its purchasing power. Recommendation 27: The starting point for the lifetime limit should be £1.8m. Recommendation 28: The current recovery charge is too high and should be replaced with a fairer charge. Recommendation 29: Headroom should be allowed on fund greater than and approaching £1.4m registered on ‘A’ Day. Recommendation 30: ‘A’ Day should be 12 months from the date the final legislation is passed to allow providers time to make the necessary systems and administrative changes. Recommendation 31: It is essential that the Government pays further attention to simplifying proposals for post-retirement death benefits. Recommendation 32: LPAs should not be introduced as they will add complexity to the market. Recommendation 33: It is unlikely that bigger increments will have a significant effect on the numbers seeking to defer. Recommendation 34: Rules on increasing increments for deferral should be introduced by April 2005. Recommendation 35: Employer-focused financial incentives will disproportionately benefit women and encourage them to make provision

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for old age. But the state has a role to play to – it must be adapted to cater for women’s employment patterns. Recommendation 36: Unisex annuity rates are not the answer to improving the pension rights of women. Measures such as financial incentives will have a bigger and more immediate impact.

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Annex A

Security, Simplicity and Choice: Technical Annex


SECURITY, SIMPLICITY AND CHOICE: TECHNICAL ANNEX ABI RESPONSE

CONSULTATION ISSUE ABI RESPONSEGENERAL A simpler pensions framework is an essential element in encouraging broader and deeper pensions coverage. The

current complexities deter employers from establishing and contributing to pension arrangements on behalf of their employees. We therefore welcome the opportunity to respond to the Technical Annex to the Green Paper Security, Simplicity and Choice – working and saving for retirement. We are keen to work with officials and ministers in DWP to But the proposals in the Green Paper do not go far enough. The DWP should have taken the radical proposals for pensions tax simplification as the blueprint for a more sweeping change to its own legislation. We are concerned that if these changes are implemented as currently proposed, unhelpful differences would remain between defined benefit (DB) and defined contribution (DC) schemes and within different types of DC arrangements. The government should take this opportunity to create a genuinely simpler private pensions framework. In so doing it must recognise the possible tensions between increasing simplicity and the potential for increased risk to the consumer and accept this is an issue that will need to be carefully considered. We welcome the proposal to consolidate pensions legislation.

Timing The Green Paper proposals will entail significant changes and resource (financial as well as staff time) on the part of providers. These will include staff training, communication to customers and most significantly of all system changes. Providers have estimated the costs of implementation could be as high as £20 million per provider. Of course, the DWP changes should not be seen in isolation but running alongside other proposed changes including the introduction of Sandler products and the changes resulting from the simplification of pensions tax arrangements. The industry is keen to ensure that the reforms are implemented efficiently, cost effectively and in a way that causes no detriment to consumers. It is essential, therefore, that providers have a long enough lead-in time to plan for and implement the required changes. In practice this will mean at least 12 months from the date on which all the legislation and regulations are finalised. The earliest the DWP changes could be implemented would therefore be April 2005. We recommend that the DWP reforms are implemented in parallel with, and at the same time as, the IR-driven tax simplifications.

PART 1: A: A NEW FRAMEWORK FOR SCHEME FUNDING

Our main response sets out our views on establishing a new funding standard for occupational pension schemes. There we make the case that there can be no substitute for a properly funded scheme as a way of providing members with adequate security. We are doubtful that the Statement of Funding principles will be of great benefit to the generality of members and propose an alternative, streamlined, method of providing members who would find such a


statement helpful with the necessary information. B: CHANGES TO CONTRACTING OUT

We welcome the Government’s proposals to simplify the rules surrounding contracting out which are currently over complex. Simplification of contracting out is likely to lead to some cost savings for providers and employers. But we feel the Government should have taken this opportunity to go further. Unlike some commentators, we wish to see contracting out retained – it provides a useful interface between the state and private pensions sectors. The Government should take this opportunity to utilise the incentive effects of contracting out to encourage more people to save more for retirement. We have proposed improving the State Second Pension by moving to a flat-rate benefit based on earnings of £15,000 whilst retaining earnings-related contracting out rebates to give a clear incentive to save in a private pension.

Survivors’ benefits As far as possible, we want to see a level playing field between DC and DB pension arrangements operating within an environment which provides choice and simplicity for all. Members of DC arrangements can chose whether to provide a spouses pension on retirement. Members of DB schemes do not have this choice. We believe that members of DB schemes should be given the option to select survivors’ pensions on retirement. The Inland Revenue’s lifetime fund limit lends itself to this type of flexibility. These rules should apply pre- and post-‘A Day’. However this radical step, whilst consistent with the Government’s over all aim of simplifying pensions legislation, may have some downsides and steps must be taken to mitigate against them as far as possible. For example, the benefits of providing a survivor’s pension (and the risks of not doing so) should be made clear to scheme members. It could also be made a requirement that if a member opts not to take a survivor’s pension, the spouse/ partner should show they have been involved in, and agree with, that decision.

LPI The Green Paper sets out a number of options for dealing with LPI for pensions in payment. We do not believe the proposal to give scheme the choice of whether to apply LPI to funds above £30,000 is workable. It simply adds a new complication and is likely to increase administrative expense. Reducing the LPI upper limit from 5% to 3% could have some merit, but we are concerned that if inflation increases, there would be pressure for the upper limit to be increased again. So we are not convinced that this is a viable option over the longer term or one that would help contain and make more certain the costs to employers of running DB schemes. As with survivors’ benefits, we believe that the overall aim should be to create a level playing field between DC and DB arrangements and to provide choice and simplicity for all. An ‘all or nothing’ approach, as proposed in the Green Paper, would help meet this objective and is the one favoured by ABI member companies. Under our proposals, members of DB schemes would be able to choose whether to opt for an indexed pension at retirement. Again, it is our view that the lifetime fund value proposed by the Inland Revenue lends itself to this approach. This flexibility carries with it some risks, ie that people may opt for a level rather than an escalating pension. Indeed, this was one of the Government’s concerns in its recent consultation document Modernising Annuities. To overcome this risk, consumers will need information at retirement showing the effects of not opting for a pension with LPI. For example, the ABI/FSA Pension Calculator shows the effects of taking a level versus escalating annuity.


Reference Scheme Test (RST) The ABI takes the view that it will be easier to satisfy the new Reference Scheme Test but that it will not be any simpler to administer. The effects on employers’ decisions to run and maintain DB schemes are likely to be marginal and it weakens provision for members. This could be a problem if they were compelled to join the employer’s DB scheme but would in fact have been better off in S2P.

Guaranteed Minimum Pensions We welcome the proposal to abolish GMPs. Restrictions on how and when benefits can be taken

We strongly agree with the proposal that the distinction between protected and non-protected rights benefits should be abolished. This will help consumers to better understand their pension benefits and will significantly ease scheme administration and help reduce costs. In particular we welcome proposals to permit benefits to be taken at the same age and allow their inclusion in the calculation for tax-free cash. But we believe the proposals should go further than currently envisaged and abolish the requirement for unisex annuity rates as this is an unnecessary difference between contracted out and other benefits. We recognise the risk that permitting this flexibility could reduce the headline level of pension available. But we believe that the trade-off in terms of greater understanding amongst consumers and administrative efficiency is worth it. The key to increasing pension provision lies not in retaining complex rules but in introducing incentives to help people to save more in private pensions and increasing the balance of the non-protected rights to protected rights pensions.

Trivial pensions We agree with the proposal to raise the trivial commutation limit. However, it is essential that IR and DWP proposals are identical in this area. We are therefore concerned at the suggestion that trivial pensions will only be available from age 65 (under the IR proposals). Trivial pensions should be available from age 50 and on scheme wind-up regardless of age. This may be a way of circumventing the concerns we have raised about the proposals regarding immediate vesting and transfers without consent.

COMBS Little new COMBS business is being written. From ‘A Day’ no new COMBS should be able to be written, but existing COMB business should be permitted to continue.

Safeguarded rights arising from divorce

We welcome the proposal. But we are concerned that the benefit would have to be paid as a pension because it would still have to be separately identifiable. We are also of the view that safeguarded rights should be commutable to bring them into line with other pension rights.

Equivalent Pension Benefits (EPBs)

We welcome the proposal to allow EPBs to be fully commutable without member consent. But we question the need to wait for a response from the member. Given the small amounts involved, this is likely to add further delay and expense.


C: GREATER FLEXIBILITY FOR SCHEMES

Modifying scheme rights (s67) We acknowledge the need to balance, on the one hand, scheme members’ rights with, on the other, enabling schemes to make changes that may make the difference between the employer closing the scheme or not. It is our view that clarifying the legislation and adopting an ‘actuarially equivalent’ approach, as set out in the consultation document would be the most pragmatic way of dealing with changes to accrued benefits. We welcome the proposal to consult with scheme members which would give scheme members a greater stake in their scheme. However, it would be undesirable if the consultation process became over prescriptive. For example, consideration would need to be given to the duration of any consultation exercise, on whom the duty to consult rested (ie the employer or the trustees) and there would also need to be exemptions for mandatory changes imposed by regulations. It might be desirable to give scheme members the right to refer cases to the new regulator where matters were particularly contentious or could not be resolved.

Member-Nominated Trustees The current rules for selecting and appointing MNTs are excessively complex and we therefore strongly support their simplification. On balance we favour Option 1(minimal legislation backed up by guidance from the regulator) although in practice there would seem to be little difference between this and Option 2 as we would expect that the regulatory guidance would in essence specify a “fair and open” procedure. Legislation will clearly need to define what is meant by the term “member” and determine what happens in situations where no members are willing to stand as trustees. We agree that where there are independent trustees, there should still be a requirement for 1/3rd MNTs.

Internal Disputes Resolution Procedure (IDR)

We support the proposals to simplify the IDR procedure. We would prefer skeletal legislation backed up by guidance from the NKR which allowed schemes to adapt a disputes procedure to its own circumstances. That guidance could be made available to every member on joining the scheme. On balance, a six month time frame for resolving disputes would seem about right. A shorter period is likely to require a mechanism for applying for extensions which is itself likely to add to complexity and uncertainty for the scheme member.

D: PRESERVATION & TRANSFERS Preservation We support the proposal to retain the existing requirement to re-value preserved pensions. Other simplifications could

include removing the rules on money purchase uniform accrual in occupational pension schemes as this is complex yet confers little if any benefit on the scheme member.

Transfers We support the proposal that the CETV should be fair to all. Proposals to consolidate transfer legislation are welcome. Contracting out proposals and the tax simplifications will, in any case, simplify the transfer process.

E: COMMUNICATION WITH SCHEME MEMBERS

Members must get the information they need in a timely manner. Information should be clear, concise and avoid jargon. Employers have a key role in communicating information about the pensions.

Options for change We would like to see a reduction in the amount of information given to new members. This should be kept to the essentials, including details of who to contact for further information, the address of OPAS and the PO. The costs to providers of communicating to customers is not trivial and the benefits of communication to individuals with small paid up pensions can be marginal. Whilst we recognise the need to alert people with small funds of the need to make adequate retirement provision, we propose that it should be voluntary in line with SMPI requirements.


Money Purchase Illustrations We support the proposal in the consultation document. F: PENSIONS ON DIVORCE Proposals to simplify legislation dealing with pensions on divorce are welcomed by ABI member companies. We

welcome proposals to consolidate secondary legislation and significant simplification will have been achieved via proposals under consideration elsewhere – eg the tax changes. It is our view that there should not be any restrictions on the types of scheme that can accept a pension credit. A pension credit should be paid at the same time and in the same manner as non-protected rights benefits. We would like all pension benefits to be paid from age 55 as this is the basis on which the original contracts were set up. Transfers should not be restricted to ‘simplified’ products – this would limit choice. We do not think the default option should be removed. Hence simplified products may have an important role here.

PART 2: PROTECTING EMPLOYEES

G: PROTECTION IN THE CASE OF WIND-UP

Fairer sharing of assets We welcome proposals to retain a statutory priority order for schemes in wind-up. But getting the balance right is clearly not easy. There will always be some losers or those who will feel unfairly treated. As far as possible, the aim should be to protect the position of pensioners who have the least opportunity to build up new pension entitlements.

Amending the priority order of creditors

Whilst this appears desirable, consideration will need to be given to the economic effects. Making pensions a priority debt could deter commercial investors from investing in companies with defined benefit schemes.

Insolvent employers As our main response makes clear, we are opposed to any attempts to create a Central Discontinuance Fund. Commercial insurance is not the solution to dealing with under-funded schemes and insolvent employers. There is no market for such a product, particularly in the current climate, and as such it is simply unworkable. Neither do we believe the Clearing House proposal will significantly increase market capacity.

Improved compensation arrangements

We welcome proposals to extend the Compensation Scheme to members whose employer is insolvent. Increasing the amount of compensation from 90% to 100% of liabilities will be of benefit to members and will not add significantly to costs.

Solvent employers We do not agree that solvent employers should be required to meet the full buy-out costs on wind-up. Rather we favour a partial buy-out basis and the reasons for this are given in our full response. We do not believe it is desirable to give employers the power to defer the scheme wind-up. This is open to abuse. The power to defer scheme wind-up should rest with the trustees or the NKR. We welcome proposals to allow liabilities on wind-up to be transferred to a stakeholder pension providing the member was more than 10 years away from retirement.

H: TUPE We welcome these proposals which will add important protection for scheme members. We support the Government’s view that a DC scheme should be considered a comparable transfer provided that there is an employer contribution. 3% would seem a reasonable starting point and would be consistent with current stakeholder pension legislation.


I: MEMBER-NOMINATED TRUSTEES

Given the need to build up member confidence in occupational pension schemes, in light of the recent number scheme of closures, we agree with the proposal to end the employer opt-out which has resulted in some schemes having no MNTs. (See comments in section C re a simpler selection and election process.)

PART 3: PROMOTION OF PENSIONS K: TRANSFERS WITHOUTCONSENT

We are very concerned at proposals that would allow trustees of occupational schemes to transfer de minimis amounts to a stakeholder pension schemes without the members consent. This simply transfers the burden from occupational schemes to ShPs. With a 1% price cap, stakeholder pension providers would find this financially unsustainable - many trustees may be seeking to transfer funds of a few thousand, or even a few hundred pounds. Ultimately, this proposal may not assist individuals with lots of small occupational benefits – they may just find these being replaced by lots of different stakeholder ‘pots’ as different sets of trustees will nominate different stakeholder providers to which to transfer small occupational pension funds. We are very doubtful that scheme members transferred without their consent will take the opportunity to add to their new stakeholder pension funds. Our proposals for improved arrangements for trivial pensions will negate the need for transfers to stakeholder schemes without consent. If the government is to press ahead with these proposals, it should adopt a de minimis fund limit approach. But £7k is too low. £10,000 is a more reasonable amount. This amount would need to be reviewed and increased to take account of price and earnings increases. The government must clarify whether stakeholder pension schemes can be required to accept transfers from 3rd parties (ie trustees).

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