Simplification is the key - Centre for Policy Studies

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3. THE EMPLOYERS’ PERSPECTIVE 3.1 In retreat Occupational pension schemes have been in retreat for many years. Employers remain under siege from increasing longevity, weak investment returns and a heavy regulatory burden. Furthermore, the accounting treatment 71 exposes risks that are outside of employers’ control, and unrelated to their core business, to the discomfort of both management and shareholders. Pension provision is also an obvious area in which to cut non-core costs, not least because of intensifying business competition brought about by globalisation. Meanwhile, media attention has focused on the apparently inexorable rise in the present value of scheme liabilities. 72 The demise in scheme quality has been accelerated by successive regulatory changes that have reshaped a pension expectation (which the company did its best to meet) into a hard commitment to the employee. The Pensions Act 1995 ushered in the minimum funding requirement (MFR) to help final salary schemes to offer their members more security, along with a funding obligation upon wind up (“Section 75 debt”). The Pensions Act 2004 then removed the MFR with scheme-specific funding based upon a calculation of the cost of funding the scheme (without a commercial buyout), on prudent assumptions. An actuarial estimate of the full buy-out cost also has to be disclosed, typically 30% higher than the non-buyout funding cost. The unintended consequence of this was to accelerate employers’ withdrawal from DB workplace pension provision. Today, open DB schemes in the private sector are all but extinct. 87% are closed to new entrants and 18% of these are closed to future accruals. A third of closed schemes are now under review, with changes in forward accrual (39%) and a move to career average 71 72 Notably FRS17 and IAS19. Whilst of concern, the substantial increase in the liability in recent years is primarily the result of falling interest rates, which could reverse. In 2005-06, for example, the liability rose by £120 billion, but some £100 billion of this was due to the discount rate being reduced in that year. 25
(35%) being considered. 75% of DB schemes are in deficit, 73 with the average ongoing funding level at 79%, down 8% in the last two years. 74 3.2 Weak government support In the 2007 Budget the Labour Government acknowledged that providing incentives for employer contributions is part of its strategy because “it is more efficient for pensions to be provided on a collective basis through the employer”. 75 Yet the only direct incentive for employers to contribute to a pension scheme is a rebate on employer NICs (currently 12.8%). Employee contributions are not exempted from NICs 76 and the deductibility of employer contributions from corporate tax is not relevant as this applies equally to wages. Clearly, little encouragement is given to employers to contribute to employees’ pensions, despite repeated ministerial statements supporting quality workplace pensions. 77 3.3 Defined contribution (DC) schemes 78 DC schemes have largely replaced DB schemes, employees thereby assuming the longevity and investment risks. Less than 20% of employees understand the risks they are taking on and three quarters are “uncomfortable” with being in a DC scheme. This explains why over 80% of members invest in the now widely available default funds (85% of DC schemes offer them). DC schemes will almost certainly lead to smaller pensions than DB schemes, mainly because contributions are lower. The average total contribution rate (member and employer) for open DC schemes was 9% of earnings in 2008, compared with 19.7% for open DB schemes. 79 The latter falls to around 15% once DB schemes’ state second pension (S2P) contracted-out rebate is taken into account. 80 73 74 75 76 77 78 79 80 The aggregate deficit (net of surpluses) of the PPF’s 7,369 DB schemes stood at £51.9 billion at the end of January 2010 (January 2009: £183 billion), PPF 7400 Index. The 2009 ACA Pension trends survey, January 2010. HMT, Budget 2007 Regulatory Impact Assessment, 10 Tax Relief For Pensions, 2007. 11% for those earning up to £44,000, 1% thereafter. For example: “I want to send a clear message to employers with good DB schemes; we want you to continue”. Mike O’Brien MP, when Minister of Sate for Pension Reform, Global Pension, January 2008. Data from The 2009 ACA Pension trends survey, January 2010. ONS Occupational Pension Schemes Annual Report 2008. October 2009. As most DC schemes are contracted in, employers (and employees) pay higher NI contributions, narrowing the contribution gap and providing a higher S2P to employees. Most DB schemes remain contracted-out, paying lower NI contributions. 26
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67: Proposal 6: post-retirement, amend
Page 68 and 69: 7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71: 8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73: The higher rate taxpayers’ perspe
Page 74 and 75: segregated from any employer-sponso
Page 76 and 77: epresent a further step down the pa
Page 78 and 79: 10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81: Such principles would have to ensur
Page 82 and 83: Figure 13: The cost of pension savi
Page 84 and 85: pool of underlying pension assets (
Page 86 and 87: hardship” facility, whereby cash
Page 88 and 89: occupational pension scheme benefit
Page 90 and 91:
CONCLUSION We would save more, for
Page 92 and 93:
ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95:
APPENDIX I Summary of proposals fro
Page 96 and 97:
APPENDIX II Value of assets in priv
Page 98 and 99:
depending upon age at the time that
Page 100 and 101:
APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105:
APPENDIX VIII THE MODEL 173 The
Page 106 and 107:
GLOSSARY Alternatively Secured Pens
Page 108 and 109:
pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
Page 112 and 113:
in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
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