Pensions Bulletin by LeesRadford


									                                                                                          18th June 2009
                                                                                             Issue No: 25
                                                                             Pensions Bulletin

Public sector pensions costs – Independent recommendations for their control
Policy Exchange, an independent research organisation specialising in public policy, has published a report
which sets out a proposal for injecting financial discipline into the management and reporting of public
sector unfunded pension obligations.

To set the scene it points out that public sector pensions are effectively a second national debt, currently
equivalent (on its calculations) to 78% of the UK’s gross domestic product (GDP) with a servicing cost of
£45.2 billion a year. This is in comparison to the official national debt, currently equivalent to 52% of GDP
and generating an annual interest payment of £31.2 billion.

The report sets out five recommendations for how the government should improve the transparency and
reporting of public sector pension liabilities. In brief, the first three recommendations cover liabilities
accruing in the future, and suggest that public sector employers make cash contributions equivalent to the
value of pension benefits accrued in a year which, together with any employee contributions, are invested in
index-linked gilts held within a newly created “Public Sector Pension Fund” with liabilities charged and
accounted for as if they were funded. It further recommends that existing liabilities are ring-fenced and run
off over their remaining lifetime - ie over the next 50 years or so. Finally, it recommends that these new
arrangements should come into force after a transitional period, possibly from 1st April 2013.

Comment         The debate on the generosity of public sector pensions will not go away and arguments are
                likely to continue to rage on the appropriate rate to use to discount unfunded obligations.
                But what is of particular interest in this think-tank report is the suggestion that the only way
                to inject financial discipline for such pensions is to create a notionally funded scheme. It
                appears that this approach has been used elsewhere and so it will be interesting to see what
                traction this report gains.

Auto-enrolment – IFS research into its potential impact on employees
The Institute for Fiscal Studies (IFS) has published research which considers the numbers and characteristics
of individuals likely to be affected by legislation requiring them to be auto-enrolled into pension

In particular, the research aims to describe the characteristics of individuals who might be brought into
private pensions as a result of these reforms by considering those who are not currently choosing to save in a
private pension. It also analyses the characteristics of those who are likely to form part of the group that
could be enrolled automatically into the new Personal Accounts by considering those who are not currently
offered the chance to join an employer’s pension scheme.

The IFS found that the overall increase in saving for retirement across the economy, which will be driven
from those currently not contributing to a private pension, is likely to be small. It also suggests that
employees might offset any increase in pension saving with lower liquid financial wealth and as the new
savers picked up by auto-enrolment are more likely to be those with lower incomes and assets anyway, this
group may also be more susceptible to increased personal debt.

The IFS suggests that once the proposals come into force, the number of Personal Accounts is likely to
increase quickly over time as individuals’ circumstances change, but that since it can be assumed that many
who would auto-enrol into a Personal Account would be inclined to make some form of retirement provision
anyway, there may be considerable competition between Personal Accounts and existing pension providers
for those funds.

Comment         There have been many reports on the potential impact of Personal Accounts on retirement
                savings and no doubt there will be many more in the run up to 2012. What sets this IFS
                report apart is the “back-testing” that shows that had the scheme been running since 2001,
                close to nine million people might have built up a stake in it within its first five years.

Equitable Life – Government’s appointed adviser publishes proposals
The Treasury has reported the publication by Sir John Chadwick of a report setting out his proposals as to
the approach he will adopt to assess the relative losses suffered by the various classes of Equitable Life
policyholder and detailing the specific issues that must be addressed so that he can advise the Government on
setting up the compensatory ex-gratia payment scheme. Sir John proposes to separately assess:

•       the relative loss suffered by those who put new money into Equitable Life (or did not withdraw
        funds when they could have done so) by reference to the difference between the position in which
        they are and the position in which they would have been had they invested their money elsewhere in
        the market; and

•       the relative loss suffered by those who remained in Equitable Life (or continued to make payments)
        by reference to the difference between the position in which they are and the position in which they
        would have been as Equitable Life policyholders had Equitable Life been properly regulated.

Sir John has asked for feedback on his proposals by 17th July 2009, with the intention that he will make an
interim report to the Treasury in the first half of August.

Sir John is a retired Lord Justice of the Court of Appeal, and was appointed by the Government in January
(see Pensions Bulletin 2009/03) to advise on how it should respond to the accepted cases of
maladministration as regards the Equitable Life. Ann Abrahams, the Parliamentary Ombudsman, has already
argued that the review being carried out by Sir John is flawed (see Pensions Bulletin 2009/19) as its remit
does not cover the full extent of her recommendations.

Comment         Progress remains painfully slow with it having taken six months from appointment to
                produce an outline of proposals for the payment scheme and no indication of by when the
                Government will accept it. Even then, there are many imponderables upon which to dwell
                before the parameters of the scheme are settled, particularly the likely results of the possible
                actions that the regulatory bodies might have taken, sufficient for the Parliamentary
                Ombudsman to have reached the opposite conclusion in relation to their failings. One tiny
                bit of good but unsurprising news in all of this is Sir John’s suggestion that individual
                policyholders should not have to prove the basis upon which they made their decisions to
                invest and stay invested with Equitable Life.

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Financial Assistance Scheme – Draft finalised regulations and Trustee update
The Department for Work and Pensions (DWP) has laid revised draft regulations (see also the draft
explanatory memorandum) before Parliament that implement more of the Financial Assistance Scheme
(FAS) proposals set out in December 2007.

It has also made available its own formal response to the consultation on the draft regulations (see Pensions
Bulletin 2009/07) from which it can be seen that very few changes have been made. The consultation
response also confirms that the DWP intends to formally consult on the development of policy on the
transfer of assets remaining in FAS qualifying schemes later in the year.

The DWP has also published its latest Trustee Update aimed at trustees, administrators and members of FAS
qualified schemes.

Social Security – Equalisation of payment ages
The Department for Work and Pensions has laid regulations before Parliament that make provision for the
increase of qualifying payment ages for certain social security benefits in line with intentions previously
outlined by the Government.

The Social Security (Equalisation of State Pension Age) Regulations 2009 (SI 2009/1488) (see also the
explanatory memorandum) updates existing regulations to provide for the qualifying age for the Winter Fuel
Payment and various other social security benefits, including aspects of the operation of the Pension Credit,
to increase from 60 to 65 between 6th April 2010 and 5th April 2020, in line with the increase in state
pension age for women.

Investment Risk and Pensions – Two OECD papers
The Organisation for Economic Co-operation and Development (OECD) has published two papers that
highlight the importance of investment risk to pension systems in the current difficult economic

•       Investment Risk and Pensions: Impact on Individual Retirement Incomes and Government Budgets
        explores how uncertainty over investment returns affects the retirement income available to
        individuals from private pension provision, and examines the resulting impact on any means-tested
        benefits payable by the state. The key finding of the paper is that public pensions, other old-age
        state benefits and the tax system act as “automatic stabilisers” of retirement incomes in the face of
        investment risk in defined contribution pension plans, but that the degree of protection offered by
        these stabilisers varies significantly between countries.

•       Investment Risk and Pensions: Measuring Uncertainty in Returns explores how uncertainty over
        investment returns affects pension systems - a matter of increasing importance due to the dramatic
        spread of defined contribution pension provision around the world. The issue has been highlighted
        by the recent financial crisis, with the OECD estimating that pension funds lost 23% of their value in

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Pensions and leaving work – Pensions Advisory Service guidance
The Pensions Advisory Service has published a timely leaflet aimed at highlighting some of the issues that
should be considered by an individual on leaving their job, such as what happens to job-related pension
arrangements and state pension entitlements, the special considerations if made redundant or put on
“gardening leave”, whether early retirement is an option and what might happen if the employer is in
difficulty or has become insolvent.

Lindsay Tomlinson to be next NAPF chairman
The National Association of Pension Funds (NAPF) has announced that Lindsay Tomlinson will succeed
Chris Hitchen as its chairman when it convenes for its annual general meeting this October. Lindsay is vice-
chairman of Barclays Global Investors Europe and was awarded the OBE for services to the fund
management industry in 2005.

Tax and state pension information for particular social groups
HM Revenue and Customs (HMRC) has published a leaflet offering guidance on taxation and state pensions
for the lesbian, gay, bisexual and transgender community. The leaflet covers income tax, national insurance
contributions, state pensions, inheritance tax, capital gains tax and tax credits, as well as stating HMRC’s
policy on its treatment of personal records and the procedure for updating them in the event of changing

This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the
law. For further help, please contact David Everett at our London office or the partner who normally advises

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