9 August 2016
- Monetary policy is not helping ordinary people and low rates may be doing more harm than good
- Ordinary savers are being hung out to dry and pension problems have worsened
- Government should issue more high interest 65+ guaranteed growth bonds – but for all age groups
The latest decision by the Bank of England to cut base rate from 0.5% to 0.25%, as well as expanding Quantitative Easing by £60billion, is supposedly designed to boost the economy. But millions of savers and pensioners are suffering serious potential income shortfalls as a result of this policy.
I believe the damaging side-effects of low interest rates have been under-estimated. Not only are significant sections of the population being hit near-term, the consequences for the medium and longer term are also negative.
Bring back special savers’ bonds: As the banks no longer want or need ordinary savers’ money, the Government could offer better interest rates directly. Bringing back the special savings bonds that were issued from January to May 2015 for the over 65s, but this time for all age groups, would prove popular. They had market-beating interest rates of 2.5% or 4% and were the most successful financial product for years. A new issue of such bonds, but not just limited to older savers would reward savers for setting money aside. This is vital if we are to sustain a savings culture in this country. Until a few weeks ago, the Bank of England had been suggesting the next move in rates would be upwards – signalling some relief for savers after years of misery. Now that rates have fallen even further instead, the authorities need to consider the impact on prudent people who want to provide for their own future. The Government also needs to consider how to help companies that are struggling with rising pension deficits. Issuing special bonds for pension funds, offering to underpin investments in infrastructure and housing, would be direct ways of helping alleviate the damage of monetary measures. The Government needs to find ways to offset the negative side-effects of the Bank of England’s latest moves.
What is the damage to savers? With interest rates staying so low for so long, and rates continually falling further, savings incentives and savers’ incomes across the economy are being destroyed. This has two damaging consequences which could actually weaken economic growth.
Lower savings income means savers save less and spend less: Firstly, many people who have saved over the years for their future are facing further income falls. This may cause them to cut spending, especially if they are in retirement and cannot see a way for their income to increase in future. Indeed, many savings account interest rates are being reduced by more than the 0.25% rate cut. Banks and building societies do not need to attract savers now, as the Bank of England’s decision to introduce its new Term Funding Scheme gives the banks cheap money directly from the Bank of England instead.
Destroying saving incentives for younger generations: Secondly, many people are deciding it is not worth bothering to save as the returns are so tiny. People who might have saved but decide not to bother will be poorer in future. Young people are losing the savings culture that the current older generations often grew up with. Modern societies still need savers, especially as life expectancy increases and the population is aging rapidly. This lack of savings, and potentially higher borrowing risks damaging growth in future.
What is the damage to pensions? Again there are two damaging consequences for pensions, both of which are likely to weaken growth.
Rising annuity costs means less pension for life: Firstly, as interest rates are pushed lower, the costs of buying an annuity have soared. People looking to lock into a guaranteed lifetime income will be offered much less pension than ever before. Even if the value of their pension fund has increase a bit, the cost of annuities has usually risen by much more. And, of course, once they lock into an annuity for life their income will never recover, even if rates rise in future. So pensioners will have less money to spend, which is hardly an expansionary policy.
Pension deficits weaken company growth prospects and reduce pension contributions for younger workers: Secondly, employers who are running final salary-type Defined Benefit pension schemes are facing much higher deficits as a result of the expansion of QE. As gilt yields fall further, employer pension liabilities have soared. Just today, the Pension Protection Fund PPF7800 index announced that its measure of pension deficits rose last month to around £400billion. It will rise further this month as a result of the extra QE. This will weaken the employers sponsoring such pension schemes, damaging their business prospects, potentially preventing them from investing or borrowing to fund growth and sapping corporate resources away from both their business and employment expansion. As most private sector final salary-type schemes are now closed, the rising deficits are likely to mean employers have less money to spend on providing good pension contributions for those workers who do not belong to these schemes, – usually younger employees.
Monetary policy is too focussed on financial institutions and borrowing: Monetary policy seems to be overlooking the negative consequences on households (and parts of the corporate sector).
Low rates do not necessarily help mortgage holders and QE has led to rising rental costs: Typically, if short-term interest rates fall, borrowers’ incomes increase, and they are expected to spend more (or even borrow more to finance extra spending). However, falling base rates may not help borrowers as much as expected. Mortgage payments are a major element of household borrowing, but around half of mortgages are on fixed rates, so they do not benefit from the base rate cut to 0.25%. Indeed, the other element of monetary policy – QE – has damaged especially younger people because it has caused rising property prices. Ordinary people have to either take out a much larger mortgage to get on the housing ladder, or must pay much more in rent. So monetary policy has made them worse off.
The Government could help offset damaging impacts of monetary measures: Because these changes in Bank of England policy have many potentially harmful side-effects, the latest loosening of monetary policy may need to be offset by fiscal measures. Certainly, the transmission mechanisms of lower interest rates are very indirect – relying on sellers of bonds to boost asset prices or stimulate extra borrowing. More direct help is likely to have a better outcome. The indirect stimulus cannot be relied upon to prevent an economic slowdown, while direct measures to increase household incomes and spending, as well as helping offset the effects of rising pension deficits, will be more beneficial to the British people.
August 9, 2016 1 Comment
4 August 2016
- Further pain for UK pensions as QE worsens deficits and increases annuity costs
- Bank of England statement completely ignores pension impacts of its policies
- Estimates suggest deficits now approaching £1trillion – this cannot be sustainable
- Government needs to consider help for employers
Today’s decision by the Bank of England to cut short-term interest rates and expand the QE programme is another blow for UK pensions. Both defined benefit and defined contribution pensions have become more expensive as rates keep falling.
Lower rates make pensions more expensive: The amount of money that is needed to pay promised pensions over future decades depends on how much return one is expected to earn on the money set aside for pensions right now. The lower the future expected returns, the more money must be put in today. The cost of pensions, whether Defined Benefit or Defined Contributions, ultimately depends on the returns on gilts. As gilt yields fall following QE, annuity rates fall and pensions become more expensive.
Rises in asset prices don’t offset rise in the liabilities so pension deficits worsen: The sensitivity analysis shows that every one percentage point fall in long gilt yields will increase the average pension fund’s liabilities by 20%, while its asset values will only increase by around 7-10%. Therefore, as gilt yields decline, pension deficits increase and any rise in asset prices is less than the rise in the liabilities or annuity costs.
Deficits are approaching £1trillion: Hymans Robertson estimated that deficits of UK final salary-type schemes post-Brexit had risen to £935billion. A further fall in interest rates as a result of today’s Bank of England announcement will see this figure increase further towards the £1trillion mark. The value of liabilities, as measured at today’s interest rates, is well over £2trillion.
This damaging side-effect of monetary policy means bigger burdens on UK employers: The consequences of rising deficits are that employers struggling to support these schemes face pressure to put in more money. The more money they put into the pension scheme, the less they can spend on supporting their operations. This undermines the aims of QE which is meant to stimulate the economy as this supposedly expansionary policy weakens the ability of the employer to grow its business. So monetary policy that is meant to boost growth has a damaging side-effect that can undermine companies. Ultimately, more employers may fail as pension deficits balloon. That would mean pension scheme members enter the PPF and their benefits are not paid in full.
Trustees caught between a rock and a hard place – need to take more risk, but expected to take less: Trustees of pension schemes, whose deficits keep rising, are facing almost impossible investment dilemmas. They are locked into a vicious circle and struggle to break out. If the scheme deficit has risen, trustees need to consider asking the employer to put more money in to fill the shortfall. But if the employer has already put huge sums in or cannot afford to do more at the moment, then trustees ideally need to find other ways to reduce the deficit. This means achieving better investment returns or reducing the benefits (which is not normally allowed under UK pensions law unless the employer is about to go bust). So trustees would in theory need to take more investment risk, buying assets that can be expected to outperform their liabilities, to reduce the deficit over time. However, in practice, trustees are usually advised to take less risk, not more risk, if the employer is considered less able to fund the deficit. They are told to ‘de-risk’ by buying assets that better match their liabilities.
‘De-risking’ becomes a vicious circle that ultimately increases risk of failure: Trying to ‘de-risk’ generally means buying gilts (or other high quality bonds or hedging), since these are supposed to better match the performance of the schemes’ liabilities. As liabilities are calculated with reference to gilt yields (conventional actuarial basis) or AA corporate bond yields (accounting measure), gilts and bonds are considered the assets that will best match the liabilities. But buying more gilts or bonds will, at the margin, force yields down further, especially in light of further QE (buying £50bn of gilts and £10bn of corporate bonds). Trustees will be competing with the Bank of England for scarce assets and pushing yields even lower and their scheme deficit will keep rising – a classic vicious circle.
Need to outperform liabilities, not just match them and gilts are not a perfect match anyway: In practice, although gilts and bonds may be a closer proxy for the liabilities than other asset classes, they do not actually match liabilities properly. There will still be duration and inflation mis-matching, as well as rising longevity, so even buying gilts may not prevent a rising deficit. And there is a further problem. If the employer cannot manage to meet the deficit payments, the trustees really need to invest in assets that will outperform the liabilities, not just match them, which means taking more risk, not less. They seem caught in a trap at the moment.
Index-linked gilt yields are negative so trustees already face deflation: Pension schemes are facing a further dangerous dilemma in addition to the pure interest rate impact on their liabilities. Index-linked gilt yields have been negative for some time and the more negative the index-linked yield becomes, the more impossible it is for pension schemes to match their index-linked liabilities over time. There are no ‘safe’ assets that pension trustees can buy to match their inflation increases. This further drives them to need to take investment risk. Indeed, this is what the Bank of England specifically suggests it is expecting, however pension schemes have been unable to do so because they are frightened of the employer position weakening further.
Bank of England seems oblivious to the pension impacts of its policies: This is what the Bank said today: “The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that are used to determine the cost of borrowing for households and businesses. It is also likely to trigger portfolio rebalancing into riskier assets by current holders of government bonds, further enhancing the supply of credit to the broader economy.” There is no mention of the effects of this policy on pension funds. In fact, if pension funds are unable to move into riskier assets, the policy is actually going to damage growth in some cases, rather than boost it. Weakening parts of corporate UK is hardly helping the economy. Monetary policy is also risking poorer pensioners in future via the impact on annuity costs. Thankfully, DC pension investors are no longer forced to annuitise too soon if they would rather wait.
Government must address these pension problems urgently: The Government has given some relief to DC scheme investors with the freedom and choice reforms. DC savers are no longer effectively forced to buy an annuity if they want to take just a small amount out of their fund. However, there has been no such relief for employers. If the Bank of England ignores the effect of monetary policy on pension schemes, Government and the Pensions Regulator need to take the issue more seriously. So far, very little has been done to address the stress on employers. I had started some work on this but it did not receive sufficient attention and is even more urgent in light of today’s announcement.
Trustees and employers seem frightened to use flexibilities already built into UK pension system: The UK pension system does have significant flexibilities which could help employers and trustees cope with difficult circumstances, however there seems to have been a reluctance to use the leeway designed to alleviate these burdens.
Must not just help one favoured scheme: The problems of Tata Steel and others have highlighted how many big businesses are simply unable to afford paying the full pension promises at current interest rates. The costs have mushroomed out of all proportion to previous expectations. The British Steel consultation proposed law changes to allow its trustees to cut members’ benefits without consent and even to make them worse off than going into the PPF itself. I believe this would be unwise and set a dangerous precedent. Rather than trying just one favoured employer, the Government needs to look at the whole system. How can employers and trustees manage their liabilities in the best long-term interests of the both the members and the business in light of QE? Too much comment seems to focus on the apparent funding levels as measured today, rather than ensuring the strength of the sponsoring employer to back the scheme in future decades.
In danger of making the best the enemy of the good: Liability management exercises, scheme pooling, longer recovery plans, member consent to benefit changes and benefit streamlining are all possible methods of managing liabilities over time in more affordable ways. Encouraging members with small entitlements to transfer to DC schemes and facilitating small benefit changes such as a statutory over-ride for schemes that need to change the inflation measure used for uprating could provide much-needed relief for many schemes. Offering pension schemes favourable terms for investing in infrastructure and social housing projects could also provide some upside for pensions while boosting the economy. It is time the authorities addressed the serious side effects of monetary policy on UK pensions before more schemes fail. I was working on these issues but there was no sense of urgency, I hope that the new Government will take this matter more seriously now.
August 4, 2016 2 Comments
1 August 2016
My comments about the future of state pension uprating have certainly caused widespread debate. Unfortunately, they have also been grossly misrepresented. I am sad about this because it has caused unnecessary upset to many pensioners and that would never be my intention.
People don’t expect someone to comment on pensions policy with a long-term perspective: I don’t know if the mis-reporting has been because of a desire to have catchy, controversial headlines, but I think it is partly perhaps because people aren’t used to someone talking about pensions policy from a long-term perspective and assume anyone proposing policies has to be thinking of the short-term. That is not my approach here.
I have always supported keeping triple lock till 2020: Anyway, my clear position is that I have always supported and continue support keeping the commitment to the Triple Lock on basic and new state pension until 2020. This is all that the Government has committed itself too now as well.
I was asked to comment on whether I thought triple lock might be removed before 2020: The reason why I wrote about this and commented on it to the press was because I was called last week by a number of journalists who said they understood that Theresa May’s chief of staff had said he believed pensioners had been protected too well, relative to other groups and asking me if I thought the triple lock and pensioner benefits might be under threat. My response was that I hope not and that the triple lock should be kept till 2020, because it was a clear commitment and we do need to protect pensioners. However, I said that beyond 2020 there is a question mark.
Law only requires earnings uprating beyond 2020 – I suggested a ‘double lock’ instead: Currently, the law only requires state pension after 2020 to be increased in line with earnings. As Pensions Minister I had been thinking about state pension policy beyond 2020 and suggested to colleagues that perhaps the Government should consider committing to a double lock from 2020 onwards.
I don’t do ‘secret’ memos!: It is simply not the case that this was part of any ‘secret memo’ as some headlines have wrongly suggested. I may have written my ideas in one of the regular weekly notes I sent to the Secretary of State about pension policy thoughts or developments, which were read openly by officials. I also had conversations with colleagues in Treasury and Number 10. Nothing secret about it at all – I don’t do ‘secret memos’ – and am happy to discuss my views openly.
Double lock protects pensions relative to the economy and society, better than just earnings: I felt that a double lock could be better than the current legally required uprating, and it would guarantee the highest increase for pensions of either prices or earnings. That means pensions would not fall behind the cost of living or the rise in average earnings, and would be protected relative the rest of the economy and society. This would give pensioners better protection than other groups, but it would not ‘bake in’ the 2.5% figure that is not related to any economic or societal yardstick. The long-term expenditure state pension expenditure forecasts assume the triple lock stays in place even though the legal requirement from 2020 is only for earnings uprating.
Nothing to stop a future Government giving more than 2.5% or more year by year: If pensioners have a double lock – best of rises in earnings or prices, there is still nothing to stop a Government, year by year, paying more than this, whether it is 2.5% or a different amount, but because that is a discretionary annual figure it would not need to be baked into the long-term finances.
Helps reduce long-term forecast cost of state pension in national accounts: By allowing this discretion, while locking in double protection, the cost of state pensions in the long-term would be reported as lower than otherwise and this could also help alleviate some of the pressure for continued rises in state pension age.
Could reduce need to keep increasing state pension age so much: I feel that raising the state pension age has been a really difficult policy and has significant unfairnesses that have been underplayed or under-recognised by policymakers. It is clear that many women were simply not told that their state pension age would be rising from age 60 after the 1995 changes and then they had a second rise imposed as well. The upshot is that some women are facing a sudden six year increase in their pension age and this has caused real hardship. Even with the increase in state pension age for men, from age 65 to 66, I am sure many men still do not know they won’t get their state pension when they reach age 65. This rise starts in two years’ time, yet the Government has not had a widespread communication campaign to publicise this. I tried to get this done, but politicians consider this is ‘bad news’ so have been reluctant to pay money for a campaign, yet I believe it is absolutely vital that we have a national campaign to warn everyone that by late 2020 nobody aged 65 will be able to get their state pension. Not only is this a problem because people may be left with little or no income, but it is also unfair in many ways. The state pension age has been increasing because of rises in average life expectancy, however there are huge variations in life expectancy across the country. Those who live in certain regions, people with heavy manual labour occupations, dangerous jobs or on low pay usually have lower life expectancy than the average, so it seems unfair to keep raising their state pension age just because the ‘average person’ is living longer. By reducing the long-term forecast cost of state pension expenditure, there would be room to slow any future rises in state pension age and, because I am thinking of the long-term and social justice, it seems to me that suggesting the double lock from 2020 could achieve a broader aim.
2.5% is an arbitrary number: The triple lock itself is really a political construct. The 2.5% makes no sense. If Government believes the state pension should be brought up to a higher level, then it can consider each year how much extra to increase it beyond prices or earnings, but without committing to an arbitrary number.
Triple lock has been used to cover up failures in other pension policy areas: Too often, when people came to me with problems about their pensions, the official reply was that the Government had the triple lock so it was unquestionably looking after pensioners properly. But of course this triple lock only applies to parts of the state pension, not all of it. Pension credit is only linked to earnings (although the Government has in fact increased it by more than earnings in most years recently). State Second Pension, Earnings Related State Pension, disability, war veterans and widows benefits, carers’ benefits are all only linked to prices, so they were frozen last year and had no rises at all. Many other working age benefits are frozen until 2020.
We must protect pensioners: My position is that we must protect pensioner incomes, that the triple lock has fulfilled a useful purpose in boosting the level of the state pension and that a double lock for the long-term would offer pensioners good protection, better than earnings alone. The double lock does not preclude higher rises if the Government of the day wants to do that in any particular future year but those rises can be decided at the time, rather than committing to an arbitrary number that has no relation to the economy or society. A double lock would also help take some pressure off the need to increase the state pension age as much as might otherwise be the case by assuming the triple lock stays in place in perpetuity.
August 1, 2016 3 Comments
30 July 2016
- Taking the politics out of pensions policy could start with the Triple Lock
- We must protect pensioner incomes – but a ‘double lock’ is better long-term policy
- Committing to a double lock could reduce need to keep raising state pension age
- Totemic political signals can prove difficult to undo but good policy needs courage
It is vital that the UK Government protects pensioner incomes and ensures pensioners are treated fairly. It is also essential that the State Pension system is affordable, sustainable and works fairly for older and younger generations. Currently, the Government has committed to a policy that will ensure the state pension rises each year by the highest of price inflation, average earnings or 2.5% – the so-called ‘triple lock’. This has increased the State Pension considerably since 2010.
Since 2010, pensioner incomes have been boosted significantly: Leaving pensioners in poverty is unacceptable, yet until a few years ago that was the fate of too many or our country’s elderly people. In 2008, the Basic State Pension had sunk to the lowest level relative to average earnings for decades. However, since 2010 the incomes of the UK’s 13 million pensioners are now more than £10 a week higher than they would have been if the state pension had only been linked to average earnings. Indeed pensioner households are no more likely to be poor than other age groups in today’s Britain.
Triple lock will have fulfilled its purpose: I believe the triple lock will have fulfilled its purpose by 2020. As Pensions Minister, I suggested that the next Parliament should secure those gains, but a triple lock is not optimal for that any more. In fact, in some ways, having the triple lock has been used as an easy symbol for politicians to point at to claim they are looking after pensioners. This can sometimes mean politicians do not believe they need to engage in more serious and in-depth policymaking for the aging population. Such totemic symbols may be politically convenient, but are not a sound substitute for carefully considered policy reform.
Must still protect pensioner incomes with a ‘double lock’: In fact, keeping the triple lock construct beyond the current commitment to 2020 makes little sense to me. It is absolutely right that we protect pensioner incomes, but a ‘double lock’ – with state pension being increased by the higher of the rise in average earnings or inflation – could still achieve that important aim from 2020. By committing to a ‘double lock’, rather than the triple lock, and dropping the promise of increasing state pensions by at least an arbitrary figures of 2.5% even if earnings and prices rise by far less than that, the long-term Government expenditure figures would show billions of pounds lower long-term pension costs.
From 2020 the law only requires uprating by earnings: The Government has only committed to keep the triple lock until 2020. Thereafter, the legal requirement reverts to uprating in line with average earnings. A double lock would give better protection to pensioners from 2020 than is currently required by law. Of course, a double lock as a legal underpin would not prevent any Government in future from deciding to increase state pension by more than this each year, but that could be decided at the time, rather than committing to an arbitrary figure of 2.5% that has no specific relationship to society or the economy.
Triple lock inflates state pension costs for the long-term: A Report produced by the Government Actuary’s Department (GAD) last year (published but then hastily withdrawn one day later) suggested that the cost of the triple lock has been about £6bn a year. The GAD said the cost of the triple lock could well be ‘materially higher’ in future, especially if earnings and price inflation stay low for a longer time. On its most likely scenarios, keeping the triple lock could add around 10% to spending on state pensions by 2040, but in a deflationary scenario the costs would be significantly more – potentially more than double the cost of just linking to earnings by 2070. By moving to a double lock, billions of pounds could be saved in future pension spending.
A double lock from 2020 is better policy and could prevent need to continue increasing state pension age: Pensioner household incomes, after housing costs, have reached levels that mean they are no worse of, on average, than younger families. It is right to continue to protect pensioners and consolidate their position, so they do not fall behind and year by year a future Government could decide to boost their income further. That would be a political judgment at the time but that might be better policy than committing to continuing to boost pensioner incomes by an arbitrary figure. The right thing to do is to commit to ensure they are protected properly each year relative to the rest of the population and the economy as a whole, but then see if more can be offered in future years at the discretion of the Government of the day.
A double lock could mean forecast state pension costs are lower, leaving less pressure to increase state pension age: If money is saved by using a double lock, this could offset the need to keep increasing state pension age. Reducing the annual uprating can save more money than increasing state pension age itself and there are major disadvantages in continually raising state pension age. Many low earners, people in heavy industrial jobs, those living in particular areas of the country have much lower life expectancy than average. These significant variation in life expectancy mean that continually increasing state pension age will further disadvantage particular groups of society. Given the problems in communicating state pension age rises too, it would be helpful to take the pressure of the need for sharper increases.
Brave political decisions are needed for good policymaking: So I had recommended that the Government should take the brave decision (brave politically, rather than in pure policy terms) to announce that it is considering moving to a double lock from 2020 onwards, as a way of ensuring fairness between generations and managing the ongoing costs of state pension age increases.
Triple lock is totemic political construct that has long-term dangers: The triple lock is a classic example of a political policy decision that is in danger of outlasting its purpose because politicians fear taking difficult decisions. It has also been a useful policy for easily asserting that pensioners are being protected, without carefully considering the long-term as well as the short-term implications and inter-generational aspects.
Political courage in the interests of sensible policy: Keeping commitment to 2.5% rise for ever makes no sense in terms of sound policy: A double lock is much easier to justify than a triple lock policy, with room for discretionary extra increases on an ad hoc basis over time. If our new Government is brave enough, there is an opportunity to signal sensible thinking on pension policy and recognise that the triple lock will have achieved its purpose. To consolidate and protect pensioners we can move to a double lock instead for the future beyond 2020.
The most recent figures on Households Below Average Income, released in June 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532416/households-below-average-income-1994-1995-2014-2015.pdf (p.10 shows the position of pensioner households) show that the percentage of pensioner households living in poverty has fallen from just under 30% in 2002/03, to 13% in 2014/15. Pensioners are at lower risk of living in both relative and absolute low income after housing costs than the overall UK population.
July 30, 2016 1 Comment
28 July, 2016
- Important new Statistical Series released today to track trends in later life working
- Massive increase in labour force participation for over 50s since the 1980s
- Older women show largest employment rise while proportion age 70-74 in work has doubled
- Rise in female participation pre-dates increase in state pension age
There is a social revolution underway, which can benefit millions of people in the UK, which is seeing increasing numbers of over 50s stay in work, continuing to increase their lifetime income, improving the productive potential of the economy and in many cases ensuring a better quality of life. As older men and women realise it is not beneficial to aspire to retire when still relatively young, the trends in employment among people over age 50 are striking.
The DWP has today released figures that will form a brand new data set for the future. They will track the trends in later life working and help us monitor how the world of work is developing for the over 50s. The new statistical series shows changes in employment trends for women and men since the 1980s.
Following my role as the Government’s Business Champion for Older Workers and Pensions Minister, I have instigated continued statistical analysis of employment trends and engagement with business to help more people and employers benefit from the skills and experience of the more mature workforce that is on offer with an aging population. The statistics released today demonstrate the historical trends that have seen sharp increases in number of over 50s staying in work.
This is all part of a much wider exercise in encouraging people to keep working, if they can and if they want or need to, and encouraging employers to recognise the enormous value that older workers offer to their businesses.
People are not necessarily ‘old’, in a conventional sense, at age 50, 60 or 70 and are increasingly choosing to keep working. This can be good news for them, good for their employer and the economy too. It will boost their lifetime income and can also be better for their health and general wellbeing.
Of course, it is also true that some people cannot work longer, or feel forced to go on when they would rather stop, but this is the minority. Surveys that were part of my Business Champion for Older Workers report ‘A new vision for older workers – Retain Retrain Recruit’ showed that most people in their fifties want to keep working past their state pension age.
In 21st Century Britain, after all the successes in healthcare and working conditions, it makes sense to celebrate the increased employment of older people and to take advantage of the skills and talents of our aging population.
July 28, 2016 1 Comment
25 July 2016
BHS could have obtained Clearance from Pensions Regulator before selling the company with its massive pension deficit
Employers must not treat pension liabilities as optional – they have people’s lives attached
Pensions Regulator has power to force previous owners to pay huge sums
The Select Committees’ Report on the collapse of BHS makes distressing reading. The whole sorry saga has highlighted poor practices by many of the parties involved, but we must not forget that it is the loyal workers who are worst affected. Many of them served BHS for years, working long hours to do their best for the business and have now lost their jobs.
What has happened to BHS workers’ pensions? Workers need to know that their pensions have not disappeared. The Pension Protection Fund is there to ensure that most of their promised pension will be paid. This insurance is not funded by taxpayers, but by employers sponsoring all other Defined Benefit pension schemes, who pay a levy each year to contribute to this compensation. Many years ago, when an employer collapsed, workers could lose their entire pension, but those days are now gone.
What is the Pensions Regulator’s role? The Pensions Regulator must protect the PPF insurance arrangement from unfair claims and ensure that employers fund their schemes appropriately. It oversees Defined Benefit pension funds, to make sure trustees and employers are looking after members’ interests and working towards paying the promised pensions.
Why did the Regulator allow the company to be sold when it had such a large pension deficit? The Regulator does not have the power to prevent a sale, but it does have the power to force a seller to pay more money into the scheme after the sale, if the employer has not supported the scheme. Our pensions regulatory system is deliberately designed to allow companies to be sold, rather than standing in the way, since this can often be the best way to safeguard workers’ jobs and the long-term future of the business.
Can employers just walk away from their pension liabilities when they sell their company then? Certainly not! When employers or trustees are facing difficulties, or when an employer wants to sell a business whose pension scheme has a deficit, the regulatory system provides for negotiations that will allow the employer to relinquish its future responsibilities for the scheme. This is known as the process of ‘Clearance’, whereby the Regulator decides how much the employer should contribute to the pension scheme before it is sold. Employers have to negotiate with the Regulator in order to work out what support they must offer to the pension scheme, before being able to relinquish responsibility for the pension promises they have made.
Why wasn’t Clearance obtained before the sale? It is really puzzling that Clearance was not obtained from the Regulator before BHS was sold. To grant such Clearance, the Regulator obviously needs to examine all the relevant information showing how the sponsor has supported the pension scheme in the past, what efforts were made to ensure its deficit was dealt with, and whether extra money should be paid in before selling the business on. This would normally be part of a sale process, when a company has a large pension deficit, yet it seems the information requested was not supplied, so no Clearance was granted. Without proper evidence, the Regulator cannot assess Clearance. That means the employer cannot just walk away from any further responsibility for the pension promises, the Regulator will be able to force further contributions. It is surprising that neither the seller’s nor the buyer’s advisers ensured Clearance was obtained before the sale was completed. This could have allowed Sir Philip to ensure no further liability.
How could a business with such a huge pension deficit be sold like this for £1? The pension debt appears not to have been taken as seriously as it should. Pension debt is real, yet it seems to have been treated almost as if it did not really exist. Indeed some of the pre-sale papers actually state that the business was being sold ‘debt-free’. It is impossible to fathom how a business with a huge pension deficit could be called ‘debt-free’. It is really important to ensure that other employers recognise they cannot just pretend their pension liabilities can be passed on to a new owner, without further responsibility.
Who did the buyer or the seller think was going to pay these workers’ pensions? One cannot help wondering how the former owners and the new owners actually believed the promised pensions would be paid? How did they believe the business would generate hundreds of millions of pounds to meet the liabilities? The worry is that the liabilities were somehow not considered to be ‘real’. But they are – and they also have people’s lives attached to them, so it is vital that sponsoring employers and trustees draw up plans to help meet the liabilities.
What happens next? The Pensions Regulator is now investigating the sale of BHS and is gathering all the evidence that it would have requested for a Clearance process. It is assessing whether the previous owners have further responsibility to put more money into the pension scheme.
Should the Regulator be able to stop businesses being sold if they have a large deficit? Corporate deals can often be in the interests of the workforce and improve long-term business prospects. Ensuring the strength of the employer to provide backing for the scheme in future decades can be as important as today’s estimated funding levels. Preventing a company from restructuring might not be in the best long-term interests of the business or could force an employer into insolvency, or damagingly weaken its ability to trade. This will not help the pension scheme. Therefore, the Pensions Regulator stands ready to help trustees and employers manage their pension liabilities for the long term in a pragmatic and flexible way, but it does rely on employers co-operating and providing the necessary information for Clearance to be granted. This could have happened with BHS, but it did not.
Is the Regulator strong enough to hold employers to account? Yes, the Regulator does have strong powers. Of course it is also possible that Parliament might want to give it further powers, after the results of its investigations are published. It is important that pension debt does not stop businesses from operating effectively, and there is a delicate balancing act between allowing employers leeway to invest in their business in the short-term and ensuring they can meet their pension liabilities in the longer-term. The Regulatory system has worked well so far, but that does not mean there is room for complacency.
Can the Regulator ensure more money is paid into the scheme? Yes, if it believes that under the previous owner, the scheme was not adequately funded, the Regulator can require him to pay in extra sums. In theory, it can require hundreds of millions of pounds to be paid.
Will members get their pensions quickly? The Pensions Regulator is conducting its investigation into what happened with BHS and who is responsible for the pension deficit. For the moment, every member is being looked after in the PPF Assessment Period, all pensioners will continue to receive their pensions and those reaching pension age will start receiving the PPF level of payment, which is around 90% of their promised pension. Unless significantly more money is found for the scheme, it will remain in the PPF and its deficit will be covered, with members receiving PPF payments in future.
Will paying in more money mean the workers get better pensions? Not necessarily. Just paying in a few tens of millions will not give the workers better pensions. Any amount less than required to cover PPF benefits will merely go into the PPF and will not give workers better pensions. Sir Philip has said he intends to fix the problem and gave assurances of this. I believe he means this and intends to pay more money to support the workers’ pensions. However, members will only be better off if enough money is set aside to pay out more than the PPF level of pension. This would likely mean hundreds of millions of pounds. The problem here is that the assessment of how much is required is based on the cost of buying annuities, which is the most expensive (but most robustly guaranteed) way to pay promised pensions. Employers would usually prefer to run the assets and try to earn investment returns, rather than paying so much extra for annuities. In theory, Sir Philip could take back responsibility for the pension scheme and then underwrite its liabilities either in full, or at better than PPF levels.
Are there other ways of dealing with the pension scheme? Sir Philip’s assurances that he intends to fix the pension problem suggest he is working on a strategy to achieve this. In the past, he looked at a liability management exercise, known as Project Thor, which would enable scheme liabilities to be reduced, while still guaranteeing to pay better benefits than the PPF. Our pension system allows such exercises to be carried out, but trustees are often nervous of using the flexibilities offered by this route. He may now be working on a different version of this, designed to pay members’ pensions without going into the PPF. It will, however, cost a significant amount of money to do this. He has suggested that he does not just want to pay in money that will go into the PPF and not give his workers better pensions, so that suggests he may want to conduct another liability management exercise, designed to pay better than PPF benefits, without buying annuities, while still standing behind the scheme.
What would a liability management exercise do? Pension funds often have members who only worked for the company for a very short time and do not have large pensions built up in the scheme. The cost of administering these tiny entitlements can be significant. The law allows employers to offer members a cash sum which can be used for another pension, or taken as cash in later life, in exchange for giving up their small pension in the scheme. Many members may find this offer attractive and it can then help improve the funding for the rest of the scheme pensions.
Why would this be attractive? If Sir Philip does indeed want to honour his pension promises to the BHS staff who worked for him loyally, as he indicated to the Select Committees, then he can do so. It would require detailed negotiations with the PPF and the Pensions Regulator and would have a large cost attached. But if the Regulator does decide that the pension scheme was not adequately supported under his ownership, then it has the power to force him to do so. However, I hope that he will already be working on finding a solution that is acceptable for all.
What about the Arcadia pensions? Sir Philip is still responsible for the Arcadia pension scheme. Along with most UK Defined Benefit schemes, this also has a large deficit. It is important that Arcadia’s advisers and trustees make sure there are adequate plans in place to address these liabilities. I assume the Regulator is also looking at this and will be demanding further information as part of its ongoing inquiries.
July 25, 2016 1 Comment
20 July 2016
- Government must stop denying fairer pension compensation to long-serving staff of failed firms
- Regulations are ready and DWP should lay them immediately
- Further delay in increasing Pension Protection Fund cap is a major injustice to those affected
- Small numbers of people but to each one this is hugely important
No justification for further Government delays to Regulations for loyal, long-serving pensioners: It is very disappointing that the DWP has failed to lay the Regulations that will allow pensioners to receive higher payments from the Pension Protection Fund. A minority of workers in failed firms have lost more than half their pension payments and are waiting for increased compensation that had been delayed for years.
The Regulations are ready to be laid this week – further delays are simply unfair: Having pushed DWP officials to get the required Regulations ready to increase the PPF cap, they should be laid immediately. All the necessary work has been completed and we planned to announce the regulations this week. It is so disappointing that the DWP has failed to act, causing further unfair delays to those affected.
Compensation won’t be backdated so any delay adds to the injustice: Those workers entitled to fairer compensation from the PPF have already been waiting for years. It is true that the PPF offers good compensation to most people whose employer fails, however the PPF cap hits some pensioners’ payments significantly. In many cases they lose more than half their pension and this was recognised as unfair a few years ago. These higher pension payments will only begin from the date the regulations are actually laid, they will not be backdated. So each week of delay can mean the pensioners losing hundreds of pounds which they can never recover.
These are not ‘fat cats’ but long-serving managers: Those affected are not ‘fat cats’ with huge salaries and did not cause the company to collapse. They can be middle managers who have been with the company for decades and worked really hard for their employer.
Legislation introduced in 2014 has still not started: In 2014, Parliament passed legislation to increase the capped PPF payouts for long-serving staff who had been with their firm for more than 20 years. I had many letters from MPs on behalf of the individuals who have suffered devastating pension losses, and I promised to act as soon as possible.
Small numbers of people but to each one this is a huge issue: The Department says this is just ‘small numbers’ of people but that is no excuse for delaying measures that are ready and have been promised. To each one of these pensioners, the loss is significant.
Tata’s British Steel Pension Fund would benefit if PPF cap is increased: In the recent consultation on Tata Steel, one of the biggest issues highlighted has been the draconian reductions in pensions for longer serving steelworkers. Increasing the PPF cap could reassure many steelworkers that the PPF will pay more of their expected pensions.
Increase in Financial Assistance Scheme cap too: I had also received agreement to increase the Financial Assistance Scheme cap along similar lines to the long service PPF cap rules and hope that this can still proceed as well.
Don’t let political considerations hold things up: It is a real injustice to allow the political fallout from the new Government to take money away from those who have lost so much of their pension through no fault of their own.
The Regulations must be announced now, before Parliament rises for the Summer: I promised these members and their MPs that we would introduce the regulations as soon as possible. They are ready now, so they should be introduced immediately.
PPF protects most members well, although not all: Over 200,000 members of final salary-type pension schemes are being looked after by the Pension Protection Fund (PPF). When their employer’s business has been unable to support their pension promises, the PPF insurance scheme takes over and pays them compensation, so they can receive much or all of the pension they were promised. Pensioners over age 65 receive compensation at the 100% level, while most members below that age receive 80-90% of their expected pension. However, some pensioners will lose far more – they could actually lose most of their pension under PPF rules because their payments are capped. Not only is the amount paid out capped, but the cap itself reduces if people took their pension before age 65.
PPF cap can result in members losing most of their pension: The significant pension losses resulting from the PPF cap were perceived to be unfair and potentially also in breach of EU legislation. The EU requires member states to protect workers’ pensions on insolvency. However, the PPF cap could result in long-serving staff losing most of their promised pension. For example, for someone who took their pension at age 60, whatever their pension would have been, the PPF will only pay just over £29,000. So if they were in line for a £60,000 a year pension, they will lose more than half their promised payments. Many people who had worked for their company for many years and who had managed to accrue higher pensions have ended up losing the majority of their payments. By contrast, other members receive closer to 90% of their promised pension.
Capped PPF rates for 2016:
|Age at which pension starts||Maximum annual pension from PPF (=90% of cap)|
For someone who starts getting their pension at age 65, the cap is £37,420.42 for 2016, and the person would receive 90% of that level which is £33,678 a year. If they started receiving their pension at age 60, the cap falls to £32,376.75 a year and the 90% level they would be paid is £29,049 a year. At age 55, the cap falls to £28,414.42 and the 90% level they would be paid is £25,573 a year.
July 20, 2016 Leave a comment
18 July 2016
- Potential dangers ahead for pensions if responsibility moves from DWP to Treasury
- Could be threats to auto-enrolment
- Must continue to address employer challenges in funding Defined Benefit schemes
It would seem that the role of Pensions Minister is being downgraded by the new Government.
What does that mean?
At the moment, we just don’t know, however it could be that this poses threats to future pensions and we must be alert to the dangers. Pensions are vital for the long-term future of millions of people in our country. We are in the middle of a major programme of reform and it needs to be guided carefully, otherwise there are dangers that pensions policy could be derailed.
What are the risks of downgrading Pensions in DWP?
Pensions Bill: The recent Queen’s Speech contained provision for a Pensions Bill, which I fought really hard to obtain. It is designed to protect pensions. Currently, people’s pensions are at risk if the trust-based DC pension scheme they are saving in winds up. I do hope the new Government will not put these important measures on hold. Members’ pensions are not safe and the protections should have been put in place long ago, they are urgently required. The new Bill would also introduce a cap on the exit charges on members’ funds when they want to move from one scheme to another. At the moment, members can lose over 5% of their money just because they need to move scheme. The new law would cap those charges at much lower levels.
Auto-enrolment: Currently, policy responsibility for auto-enrolment lies in the DWP. If the Treasury takes this over, there are risks to the programme. Auto-enrolment is working really well, as millions of workers are saving in pension schemes for the first time, with the help of their employer. We are establishing as the norm that every employer is expected to provide a pension for their staff. This is a major change but is an essential part of the radical pension reforms that are underway. The new state pension will have no more earnings related elements building up, so all the earnings linked retirement income must come from private pensions or other assets. We must not let the EU referendum fallout derail this vital programme.
Defined Benefit Pension schemes: At the moment, the DWP is responsible for our system of pension protection and there are over 11 million workers saving in Defined Benefit schemes who need a robust protection framework. Funding levels of many schemes have deteriorated sharply, despite employers putting significant sums into them, and the Government urgently needs to address the challenges facing trustees and employers in connection with meeting their pension promises. Work is already underway in the DWP which I had initiated last year and accelerated recently, but it is complex and needs careful handling. A new Pensions Minister needs to engage with this work and manage the issues surrounding the British Steel pension consultation and the knock-on effects on all other schemes.
Pension Wise: Responsibility for Pension Wise recently moved from Treasury to the DWP, to ensure all publicly-provided pensions guidance is located in one place. As DWP was already responsible for the Pensions Advisory Service (TPAS), it made sense to put Pension Wise and TPAS together and form a new guidance body to help people engage with planning their later life income. This was also due to be in the new Pensions Bill and I do hope it goes ahead, even if based within Treasury again, rather than DWP. The public need help and guidance to understand how to plan their retirement income and customer satisfaction with the Pension Wise service has been very high. The new Government must not let this be a casualty of the recent political upheavals.
Bringing private pensions policy under one roof
Last week I suggested to Number 10 that I would be delighted to help the new Government with a radical overhaul of pensions policy responsibility. This could see all private pensions policy joined together in one place, under a Minister in the Treasury, while State Pension policy stays within the Department for Work and Pensions. Indeed, I proposed this to David Cameron last year after he asked me to be Pensions Minister but he decided against it.
I think it makes sense for private pension savings policy to be run in one place, rather than being split across Departments. I would have been happy to do that in the new Government but only based in the Treasury, not the DWP. I wonder if there may be a move in that direction?
Why would it make sense?
As the new state pension means an end to contracting out, the role of the DWP in private pensions is much reduced. Under the old system, millions of people were building a part of their state pension in a private pension scheme, paying lower National Insurance in exchange for giving up rights to part of their state pension. This policy has ended, so the state and private pensions are now totally separate. Therefore, it might be a good time to merge private pension policy together in one place rather than having contract-based private pensions policy resting in the Treasury, while trust-based pensions policy is made in DWP. There are currently two different regimes, one for pension schemes set up under trust and one for pension schemes that are under contract law. Bringing these policies together could help streamline and rationalise the rules, although there would be enormous complexity in doing so.
July 18, 2016 2 Comments
June 22, 2015 2 Comments
As most readers of this blog will know by now, I have been appointed Minister for Pensions in David Cameron’s new government.
Having spent so many years studying pensions, savings and retirement policy as an independent expert, I have the chance of working inside government to drive things forward. It will certainly keep me busy and be a great new challenge.
Recent years have seen sweeping changes to our pensions system, changes which have started to move pensions in a positive direction for the first time in years. I now have the responsibility of continuing and building on this momentum.
Believe me, I am aware of the hard work that lies ahead. I want to make pensions work better, be more easily understood and more popular. For me, pensions have always been about people, not just about money and I will always try to bear that in mind in my policy deliberations.
We must continue to ensure today’s workers can save for their retirement with confidence. Automatic Enrolment has encouraged more than five million people into a workplace pension – but we still have a further five million to go, as the system continues to roll-out. Opt-out rates have been encouragingly low, but so are the minimum contributions and of course we will need contributions to increase over time.
This is hugely important – most of us can expect to live longer than ever before and must save for our futures if we are to enjoy our later years in relative comfort. I am aware of the challenges of making the second half of the Auto-Enrolment roll-out go as smoothly as the first, and am conscious that the particular needs of smaller and micro employers have to be considered.
It has been really encouraging that the youngest workers have been those least inclined to opt out after being enrolled. But we mustn’t become complacent – we need to do all we can to ensure protective measures are in place to cement people’s trust in their pension investments and encourage engagement.
We need to improve consumer protection and financial education to help people understand more about getting a fair deal and the value of saving. As successful as Auto-Enrolment has been up to now, we cannot just assume the job is done.
I believe passionately that the new pension freedom reforms have made an historic difference in allowing people to make the most of their hard-earned savings. They provide consumer choice for all, not just the wealthiest, rather than forcing most people into buying an annuity that may not be suitable for their needs.
I have been saying for years that we must trust people with their own money – and I believe most British savers will be responsible when it comes to making these long-term decisions. With the help of Pension Wise guidance, improved financial education and ultimately advice, many more people can make sensible decisions for themselves. Encouraging more later life working, particularly part-time, also has the power to benefit many people if they want to increase their lifetime income.
Towards the end of the last Parliament, the Government announced that the new pension freedoms could be extended to those who already have annuities – I very much hope this will become reality.
Next April will see the roll-out of the new State pension. This long-overdue reform will see today’s complicated multi-tiered system of basic and additional State Pensions ultimately replaced with a clearer, fairer, single-tier payment. People need to understand what is happening to the State Pension and we must try to explain it more clearly, despite the complexities of the existing system.
It will benefit many – but it is not yet fully understood. Importantly, it will bring an immediate and significant reduction in the proportion of pensioners on means-testing. I have long warned that we must reduce means-testing penalties, so that people, especially the poorer pensioners, are not penalised for past saving or for continuing to work longer if they wish to. We need to incentivise private provision, rather than penalise it.
And this is all just the start. My in tray is ever growing and I can expect a busy and exciting time ahead. Please give me some time to settle in, consider the landscape and work my way forward with the tasks that need to be done. I will do my very best to help in as many areas as I can, but I cannot make any announcements at this stage and it is not reasonable to expect instant action. It will take a while to assess what is best.
Due to the demands of my new role, unfortunately I won’t be able to maintain this blog for a while. But don’t expect to stop hearing from me!
From inside Government I intend to remain dedicated to championing the rights of consumers and standing up for fairness, while working closely with the industry as we all adapt to the changing pensions landscape. Ultimately, it will benefit everyone involved in pensions if we can find ways to improve customer experience and satisfaction.
It’s an exciting time for the world of pensions and it is essential we continue the progress for today’s pensioners as well as for future generations. I will try hard to make pensions work better for people and hope to be able to make a real difference. I would like to thank all of you who have offered me your support, kind comments and warm words – I will do my best to achieve success.
May 17, 2015 4 Comments