4 January 2017
- UK private pensions are in mortal danger – their huge benefits seem under threat
- Anyone who cares about pensions should be very, very worried
- Latest Treasury info doesn’t mention pensions when educating the public about retirement saving
- Future generations face worse later life income if Treasury succeeds in undermining pensions
- ISAs are sub-optimal way to provide for later life and will saddle future Government with rising pensioner poverty – pushing more costs onto the young
- Now is the time to promote the benefits of pensions so people understand
The Treasury has just released an infographic for the public, which shows how to save throughout the lifecycle, but doesn’t mention the word ‘pension’. This is further evidence of the concerns I have expressed before about Treasury attitudes to pensions. It suggests that our private pension system is under existential threat.
Treasury sees pensions as a cost, but they are a real benefit to millions of people: During my time as Pensions Minister, there was clearly a difference of view between Treasury and DWP about private pensions. The Treasury sees them as a cost to the Exchequer. DWP sees them as a benefit for people to give them a better later life standard of living. That is how most people see them and why they are so important.
Treasury trying to promote ISAs but who is promoting pensions?: Having battled against the Lifetime ISA, it is deeply troubling to see the latest public information from the Government, talking about ‘ISAs and other savings options’ which omits to mention pensions when saving for retirement. The huge advantages of pensions are totally ignored.
Anyone using a Lifetime ISA, instead of a pension, is likely to end up with less in later life: Private pensions are far better than ISAs in terms of their behavioural design. Using a pension, instead of a Lifetime ISA, should ensure you have more money in later life. Future Governments will have to deal with the consequences of more poor pensioners, and greater strains will fall again on younger generations.
Pensions have many advantages over ISAs: Pensions can give you free money from your employer, more Government contribution to your savings, controls on the charges, better investment options for long-term growth and behavioural nudges to stop you spending the money too soon. The pension can pass on tax-free to your loved ones, or can keep growing as you get older and provide a fund to help pay for care if you need it as you get older.
Using ISAs will mean less money in later life: ISAs are more likely to be held in cash (giving lower long-term returns), have no controls on charges and encourage you to take all the money as soon as you can, unlike pensions which have incentives to stop you spending the money too quickly.
The big problem with pensions is that many people do not appreciate their huge benefits: It is time for the pensions industry to start promoting the advantages of using pensions to provide for later life. We need an advertising and marketing campaign to tell people why pensions are so valuable, we can’t assume everyone knows. Just saving in cash in an ISA is not a good way to provide for later life.
If you care about private pensions and believe they are worth fighting for, now is the time to stand up and shout about their benefits: Before it’s too late and they are supplanted by an inferior product because of short-sighted policymaking that will leave long-term dangers.
January 4, 2017 1 Comment
4 January 2017
- Oldest and poorest pensioners are not protected properly by triple lock as it only protects two parts of State Pension
- Triple lock has kicked in for 2017/18 as earnings and prices rose by less than 2.5% but pensioners deserve proper protection, not just political gimmicks
- Keeping triple lock in future gives more money to better off and younger pensioners
- Healthier and wealthier pensioners get £200 a week State Pension by deferring while poorest and oldest get much less
Pensioners fall for politicians’ triple lock trick: Politicians have been using the triple lock as a lazy way of claiming to offer pensioners brilliant protection. However, delving more deeply into how it works, shows it is increasingly unfair.
The 2.5% element of the triple lock has kicked in for 2017/18: For 2017/18 the triple lock’s 2.5% was more than price inflation (cpi 1%) and earnings inflation (2.4%), so the 2.5% part of the triple lock kicks in – but only for two parts of State Pension – new State Pension and the basic State Pension of the old system. The other parts of pensions only have a link to prices and Pension Credit for the poorest pensioners is only linked to earnings so it will fall behind the new State Pension for the poorest pensioners.
Triple lock does not properly protect oldest and poorest pensioners: The triple lock is not protecting many pensioners. In light of the new State Pension system which started in April 2016, the triple lock leaves oldest and poorest pensioners relatively worse off, even though they need most protection. Older pensioners, who are on the old state pension will only have the basic State Pension protected – a maximum of around £120 a week, while newer pensioners have the full new State Pension of nearly £160 a week protected by the triple lock.
Triple lock policy impact seems the wrong way round: The much-trumpeted ‘triple lock’ on State Pensions has been used by politicians to pretend that pensioners are brilliantly protected. In fact, it is lazy policymaking, which seems to allow politicians to feel they are absolved from other needed measures to protect pensioners. The longer it is maintained, the more unfairness it will create.
Poorest pensioners on Pension Credit do not have triple lock promise: Pension Credit only rises in line with earnings. If the new State Pension (which is designed to always be above the Pension Credit level) remains triple locked, while Pension Credit only increases with earnings, then the poorest and oldest pensioners will become relatively poorer. The longer the triple lock stays in place, the more the State Pension favours younger pensioners and relatively disadvantages poorest pensioners.
Now is the time to consider better approaches to managing state pension costs than just keeping the triple lock and increasing state pension age: Government must consider how to manage State Pension costs more fairly than just continually increasing the State Pension age, which unfairly penalises people with lower life expectancy and long working lives. Realising the inefficiency and unfairness of the triple lock, and the problems created by continually increasing state pension age, can help improve the operation of state pension policy in future.
Healthiest and wealthiest over 65s can boost new State Pension to £200 a week: Under the new State Pension system, those pensioners who are in good health, have other income that pushes them into the 40% tax band or are still working, can choose to defer their State Pension and will get 5.8% extra for each year they delay. If they delay till they are 69 years old, they will get £200 a week. However, those who cannot afford to wait, or are in poor health, get much less.
New approach to State Pension needed from 2020: The Government should consider how to replace the triple lock promise from 2020 onwards, to prevent it from benefitting the younger and better off pensioners most. A double lock, increasing all parts of State Pension in line with the best of prices or earnings, would ensure pensioners keep up with the rest of society and the cost of living to prevent pensioners falling behind in future. And, of course, a double lock would still leave politicians free to increase more generously if they believe that is appropriate in any year.
Uprating for different parts of State Pension Protected by Rate of Increase 2017/18
Basic State Pension (max c.£122.30pw) Triple lock +2.5%
New State Pension (max c.£160pw) Triple lock +2.5%
Pension Credit (max c. £160pw) Earnings +2.4%
Graduated Pension cpi +1%
SERPS cpi +1%
S2P cpi +1%
Deferral increases on State Pension cpi +1%
Protected Payment for new State Pension cpi +1%
Full triple protection does not apply to all elements of the State Pension: The triple lock means the maximum Basic State Pension for older pensioners rises by 2.5% for a single person, from £119.30 a week in 2016/17, to £122.30 a week in April 2017. However other parts of the old State Pension (Graduated Pension, SERPS, S2P) only increase by cpi price inflation, which is 1%. In contrast, the new State Pension (replacing the old basic State Pension, Graduated Pension, SERPS and S2P) will rise by the full 2.5% of the triple lock, from a maximum of £155.65 a week, to £159.55 a week from April 2017. Clearly, the triple lock promise gives much better protection to the newest pensioners – many of whom will still be working and are not those who need most protection in future.
January 4, 2017 Leave a comment
23 December 2016
- Major pension scandal destroying people’s lives
- Family plumbing firms face financial ruin due to flawed pension laws but big firms walk away
- Good employers, who’ve paid their contributions properly into an industry-wide plumbers pension scheme, face personal bankruptcy by pension rules
- The law forces them to pay for pensions of thousands of workers who never worked for them – 400 employers saddled with debts for 4000 others
- Some are on the brink of nervous breakdowns or worse after being let down by our system
As we approach Christmas, spare a thought for victims of flawed pensions laws. A pension scandal which has so far failed to gain much attention is ruining good people’s lives. It involves small plumbing firms who face personal bankruptcy because the law forces them to pay for pensions of people who never worked for them. Many are family-owned businesses with no limited liability protection and will lose their homes and everything they have. They are on the brink of nervous breakdown or worse.
Ruined financially for doing the right thing: These plumbing industry employers just wanted to offer a decent pension to their handful of employees. They paid into an industry wide plumbing pension scheme which started in the 1970s. Some employers have been contributing for their staff for years, always paying what they were asked to pay. There are now only around 400 employers left in the scheme, but in the past there have been over 4000. The remaining 400 are suddenly finding, if they need to retire or pass their business on to someone else, they may owe hundreds of thousands of pounds they cannot afford. This money is demanded by law and they cannot avoid the debts.
Plumbing industry scheme was fully funded in 2014, but has huge deficit now: In 2014, the actuarial valuation showed the £1.5billion industry-wide multi-employer scheme was fully funded on the basis of paying pensions as they become due over time. Since then, interest rates have plunged and annuity costs have soared and, if the scheme needed to buy annuities, it is estimated to have a £1billion deficit.
Forced to pay cost of annuities for their own employees and thousands of other people who never worked for them: Once these small employers have no more employees in the scheme, or if they are too ill to manage their business, the law requires them to pay ‘Section 75 debt’. Under these rules, they must immediately help meet the notional cost of buying annuities for hundreds or thousands of workers who are nothing to do with them, as well as for their own few staff. These poor plumbers, who are unincorporated firms, family businesses, or partnerships, are required by this flawed legislation to pay for the workers of past employers who have left the scheme or gone bust.
Like ‘Hotel California’ they can try to check out, but can never leave: These people are effectively imprisoned by their pension scheme and face bankruptcy, the loss of their homes, their business and their whole life savings if they leave the scheme. Unlike BHS, these small employers cannot just sell their business to someone else and hope all will be ok. They cannot even transfer it from father to son. They cannot retire. They cannot move their employees to a new pension scheme. If they do any of these things, they will owe so much money that they face financial ruin. There is currently no way out for them and their families. They have been begging the Government to help them but so far nothing has been done.
Here are just a couple of examples:
A plumber took over his grandfather’s business and put his two employees into the pension scheme in the 1980s. He is now 67, needs to retire and wants to pass his business to his son. But doing either of these things would mean he becomes liable for huge sums he cannot afford. He would lose his home and be made bankrupt, with nothing to live on in retirement. He can see no way out. He is stuck, held hostage by the pension scheme.
A few years ago, another man took over the plumbing business his father started in 1982. He now has a young family and, after difficult trading during recent years, he employs just one plumber who is still in the plumbing industry pension scheme. He would like to close the business but has suddenly discovered that this means the law would require him to pay £1.7m which of course he cannot afford. More than half of this money relates to pensions for thousands of past employers who are no longer in the scheme). He says he feels ‘totally destroyed, depressed and worried beyond belief’ and ‘just wants to curl up in a ball and die’.
What can the Government do? Ministers must address this scandal quickly. The Work and Pensions Select Committee has also called for urgent action to address the inadequacies of the current Defined Benefit pension system, but the Government is showing no sense of urgency here. The legal framework for Defined Benefit pension schemes needs to be adjusted to recognise the unintended consequences of the current system. As Pensions Minister, I initiated work on this in Summer 2015, but 18 months on and still nothing has happened. These employers have not tried to walk away, they have not chosen to underfund their scheme, they are innocent victims of flawed legislation.
Government needs to act swiftly: In recent months, the Government has issued consultations on Tata Steel and many minor pension matters but has done nothing for the plumbers affected. I did highlight this problem in my evidence to the Work and Pensions Select Committee (see paragraph 29 of their latest Report http://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/55/55.pdf ) and also raised it during the Committee debate on the Pension Schemes Bill in the Lords, but the scandal drags on.
Section 75 debt rules need to be adjusted – more flexibility for annuity requirement and joint and several liability: A new approach to employers leaving their multi-employer scheme is needed, with flexibility to accommodate unincorporated or small employers in non-associated multi-employer schemes who have been inadvertently caught out. The rationale for Section 75 debt was to ensure employers cannot just dump their pension obligations onto the PPF or onto other employers, but the way it is operating in the case of such multi-employer schemes is patently not what was intended. These employers are not trying to dump their liabilities, but are being forced into bankruptcy by unfair law. The strict annuity requirements should be relaxed and these small employers should not have to pay for employers who are nothing to do with them.
ITV’s Joel Hills will be highlighting this injustice at 6.30pm today 23rd December 2016 – I hope it will get good follow up in the New Year too so that the Government will sort this out with the urgency it deserves.
December 23, 2016 2 Comments
14 December 2016
Jeremy Hunt is right we need for private savings to help fund care crisis
- There’s no one solution but private savings must be part of the mix
- Care costs much higher for older women than older men
- Government can introduce tax incentives to help families save for care costs
- Care ISAs, Workplace Saving Plans, Eldercare vouchers, Family Care Saving Plans free of Inheritance Tax
- Consider using auto-enrolment and free Guidance to kick-start care savings as part of 2017 auto-enrolment review
Jeremy Hunt is right – people will need private savings to help fund later life care: Politicians have talked about social care for years, but have ducked the difficult decisions required to address this time and again. Despite knowing that numbers needing care will rise inexorably, policymakers have not set aside public money, or encouraged private provision to pay for care. The quality of care has suffered, many companies cannot afford to deliver decent care within the council budgets, and the screaming headlines from recent days continue to highlight that this crisis is just getting worse.
There is no money set aside for care: There is almost no money earmarked to pay for the care people will require – not at public or private level. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.
Problem is worse for older women than for men: The CII Report released yesterday on Risks in women’s lives found that this is a much worse problem for women. The median man over age 65 will need to spend around £37,000 on later life care, but the median woman will need around £70,000. Where will this money come from? It either has to come from councils on a draconian means-tested basis, or the NHS (when early intervention or prevention is not funded), or individuals and their families who suddenly find themselves faced with huge spending they had not prepared for. And of course older women are less able to save for their future needs because they are more likely to have to cut down or stop working to provide care for loved ones – society takes this free female caring for granted.
Families will need to prepare for some costs, but they need help. Local authority care funding is subject to one of the strictest means-tests. Most people will receive no help from the state until they have used up the bulk of their assets (down to £23,250) and until their needs are considered ‘substantial’, causing significant distress to many families and leaving the majority of families without the care their loved ones or they need. Many suddenly have to find significant sums at short notice. Ideally, money is needed for prevention and early intervention, so that people can have a little help or pay for measures that will ensure they are safer and less likely to fall. But they need to know what to do.
Products for care funding are inadequate. There are some products already on the market to help people pay for care but they are expensive and will not help with prevention. These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans, but each has advantages and disadvantages and they only help at the point of need, rather than allowing people to make plans in advance.
Encouraging saving for care could help. It seems that Jeremy Hunt may be signalling that at last the Government recognises the importance of helping families prepare for social care costs in advance. People don’t know they will need such sums, but if they spend all their pensions or ISAs before they reach their 70s and 80s, they may really regret not being able to pay for the help they need. I believe Jeremy Hunt is correct, some private savings will have to be part of the mix. 21st Century retirement income is about more than just pensions.
Extra tax breaks to encourage long-term care saving. We spend around £40billion on incentives for pension saving and not a penny on incentives for social care saving. 21st Century retirement needs more than a conventional pension to help fund later life. Providing taxpayer incentives and employer incentives is important because the cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS and on younger generations as well as on older people. Urgent action is needed to head off a disaster that is clearly on the horizon.
Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care or allow people to transfer existing ISAs. Launching such ‘Care ISAs’ would itself help people realise the need to save for care. It could allow up to, say, £50,000 or £100,000 per person to be earmarked for care spending and such Care ISAs could be passed on free of inheritance tax to fund Care Savings for the next generation too.
2017 review of Auto-enrolment could consider encouraging workplace care saving plans: Alongside auto-enrolment, it might also be helpful to ensure that employers are encouraged to offer the option for people to save in a workplace savings plan that is set aside specifically for care.
Workplace Saving Plans and flexible benefits packages to include eldercare: The Government needs to incentivise employers to help staff prepare for care costs. This can include savings plans to build up a fund to cover care costs, and also such ideas as eldercare vouchers, along similar principles to childcare vouchers. Employers can help their staff pay for someone to look after elderly loved ones, rather than having to leave work or suffer stress when such help is not available. This could be part of a flexible benefits package, which receive an employer contribution.
Family Care Savings Plans – IHT free: Another possibility is for families to save collectively for the care needs of their loved ones. For example, parents, siblings or children might join together to build up a fund in case one of them needs care. The probability is that one in four people will need care, but nobody knows in advance which one. Tax breaks to incentivise this kind of saving, perhaps allowing them to be passed on free of inheritance tax, would help. There is a role for insurance with such savings plans – which might also include some ‘catastrophe insurance’ to pay out if more than the expected number in any family or group actually need care.
Tax free pension withdrawal if used for care: The new pension freedoms could encourage people to set aside money for later life care. Now that the annuity requirement has been removed, and there is no 55% death tax, pension funds could help cover care costs. Many people reaching retirement have tens of thousands of pounds in their pension funds but if they use this to buy an annuity, they will have no money to pay for care. Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed.
Demographics show numbers needing care set to soar: The cohort needing care at the moment is a relatively small proportion of the population, but millions of baby boomers are currently reaching their 60s and will need care in the coming twenty years or so. The numbers needing care are, therefore, set to soar.
Long-term care funding is one of the least understood parts of the health and care system. Unfortunately, many people mistakenly believe the Government will pay their care costs. But social care is the responsibility of local authorities, not the free NHS. This system dates back to the Poor Laws of the 1800s and was completely omitted when Beveridge developed our National Insurance system and welfare state. The difference between social care and healthcare is not easy to define, but as an example, someone with cancer is likely to qualify for healthcare funding with care provided at taxpayers’ expense, while someone with dementia may not be considered to have a ‘health’ need and gets no public money at all.
Public need to be informed about preparing for care: We could extend the PensionWise Guidance service to provide information and education for people about preparing for care needs. This could come from their pension savings or additional savings but because people don’t understand the system, they will definitely need help in planning for care.
The time to address this crisis is now: It cannot wait longer without causing more misery. Social care in this country is failing and radical action is long overdue. This is not just about elderly people, it’s about families and loved ones who are being denied a decent standard of living in modern-day Britain. Introducing incentives to help people save for later life care, as well as earmarking more funds from council and healthcare budgets, in an integrated fashion, will be vital parts of any solution.
December 14, 2016 1 Comment
12 December 2016
Action to address care crisis cannot wait any longer – need a 21st Century revolution
- Britain’s welfare state has never included social care – time for a rethink
- Social Care system dates back to poor laws principles from the 1800s
- Ultimately, National Insurance or tax will need to cover care funding
- All parts of the system are failing and Government has not yet offered solutions
- Private and employer provision can also help – such as Care ISAs, Family Care Plans, auto-enrolment, eldercare vouchers and free guidance
Britain’s welfare state, developed in the 1940s, was said by its architect William Beveridge to be a “British revolution”. We need another revolution to fit with 21st Century lives as the population ages.
National Insurance was supposed to break away from Poor Laws, but social care was never included: Our National Insurance system of benefits and support was designed to break away from the legacy of the Poor Laws, which were a harsh safety net, for those in dire need. The 1940s welfare state aimed to establish a new, universal system on completely different principles, giving support for everyone, as of right. However, social care did not feature in this new system.
NHS never included social care: The National Health Service would give healthcare to all, free at the point of need, funded by taxpayers. However it did not factor in social care, which was left untouched and still the responsibility of local councils. In the 1940s, the concept of millions of chronically ill older people needing a little help with their daily lives on a long-term basis was unthinkable. Either their families or local communities would look after them, or they would not live very long. 21st Century life is totally different, but our social care system is stuck in the past.
Government must wake up to the reality that social care cannot be left unfunded: Failing to fund social care means millions of people do not get decent, or any, care. If Beveridge had realised the forthcoming population dynamics, he would have included provision for long-term care needs in the welfare state. In the 70 years since our system started, no Government has taken this issue seriously enough – it’s time for a rethink.
Ultimately, taxpayers or National Insurance will need to fund social care: There is little doubt that a 21st Century Beveridge would have included social care funding in the National Insurance system. This is a clear risk now, which was not on the horizon in the 1940s. Ultimately, Government will need to tackle the costs of social care provision at a national level, whether via the tax system or National Insurance.
The current cohort needing care is relatively small – it will grow significantly soon: Demographic trends clearly signal a dramatic rise in the numbers of older people needing long-term care. The current cohort of elderly people is relatively small. However, millions of baby boomers are now reaching their 60s and will need care in the coming twenty years or so. The Government has not planned for this huge looming cost. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.
Cutting social care provision is short-sighted and leads to long-term cost increases: Social care provision by councils has been cut and cut in recent years. Even as the numbers needing care have risen sharply, local authorities have reduced availability. A few years ago, people with moderate needs could receive moderate amounts of help – now only those with substantial needs get any council care. There is no help with prevention or early intervention. That is a short-sighted saving causing extra long-term pressure. And the amount of care being provided has also been cut – 15 minute visits are common, with no pay to careworkers for travel time between clients – which means the quality and dignity of care have also been reduced.
NHS at breaking point: As increasing numbers of elderly people do not have their care needs met, they end up in the NHS after avoidable accidents, blocking the NHS system – as the NHS is the backstop with last resort funding from taxpayers. This will put intolerable burdens on the NHS, on younger generations and on older people. Urgent action is needed to head off a disaster that is clearly on the horizon.
Those who pay privately are subsidising council underspend: Most people will receive no help from the state until they have used up the bulk of their assets, causing significant distress to many families and leaving the majority of families to find huge sums at short notice. Even worse than this, local authorities are not paying the full costs of care for those they are funding via the means-test. This forces care homes and homecare firms to charge private payers extra, to subsidise publicly funded residents.
Healthcare and social care must be integrated. The current distinction seems arbitrary and manifestly unfair). Until the Government properly integrates social care with healthcare and insists on higher standards across the industry, the current crisis will only worsen. This should be a major political issue, but it is not receiving sufficient attention. The public is not being adequately informed of the problems and possible solutions, leaving families struggling to cope and elderly people at risk in a system that is failing on all fronts.
The £72,000 cap is not a solution. The £72,000 cap was supposed to ensure nobody has to face catastrophic care costs, but it does not solve the problems of our system. It is one small part and the £72,000 cap was set too high to achieve its original objectives. In fact, it is not a £72,000 cap at all. Most people will actually have to spend more like £140,000 on care before they receive any state help because the cap does not cover board and lodging costs (around £12,000 a year must be paid privately) and will not cover any money spent before care needs become substantial.
We’ve left it so late, there is no single solution but encouraging saving for care could help. New products and approaches, together with new Government incentives, are urgently needed to help people prepare in advance for care spending if it is needed. A savings solution should be part of the mix. This could include new tax breaks to encourage long-term care saving.
Tax free pension withdrawal if used for care: Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed. If they don’t spend it on care, it will pass free of inheritance tax to the next generation as the 55% pensions death tax has been abolished.
Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care. Launching such ‘Care ISAs’ would itself help people realise the need to save for care.
Family Care Savings Plans – IHT free: Another possibility is for families to save collectively for the care needs of their loved ones. One in four people will need care, but nobody knows in advance which one. Tax breaks to incentivise this kind of saving, perhaps also in the workplace, allowing funds to be passed on free of inheritance tax, would help.
Workplace benefits could help – such as auto-enrolment into workplace care saving plans or eldercare vouchers: Alongside auto-enrolment, employers could be encouraged to offer the option to save in a workplace savings plan specifically for care. This could be part of a flexible benefits package, which might also include eldercare vouchers to help families pay someone to look after loved ones, rather than having to stop work to do so.
PensionWise Guidance can help provide information and education: The Government’s new ‘Pension wise’ free guidance service already tells people about planning for care costs and more people could use this service to help understand the system.
Message to Government – this cannot wait, it must be tackled now: So, the message to the Government is that our care system is in crisis, there is no money set aside either publicly or privately to fund later life care adequately, and the time to address this crisis is now. There is no single silver bullet solution, a range of policies is required. Social care in this country is failing, radical action is long overdue.
December 12, 2016 1 Comment
7 December 2016
Common sense prevails at British Steel – jobs secured
- But not clear what will happen to British Steel’s 130,000 member pension scheme
- New pension scheme seems generous compared to average UK schemes nowadays
- But Tata says old British Steel scheme will be ‘de-risked’ and ‘de-linked’ – could mean going into the PPF or could mean standalone
- Ongoing negotiations with the Pensions Regulator likely and no details yet available
Saving jobs is so important for South Wales: It is great news that the unions and Tata Steel have reached an agreement that could secure jobs and steel production at Port Talbot’s blast furnaces for years to come. That is really important to the people of South Wales and it seems the unions have worked really hard to preserve the industry that is so important. But this is all subject to consultation so it must still be ratified by the workforce.
Job security vs. pensions: The job security and new investment in the business seems to have come, however, partly as a consequence of changes to the pension arrangements enjoyed by the 130,000 British Steel Pension scheme members. By closing the scheme and looking to change future arrangements, Tata’s burden of ongoing pension contributions could be reduced.
Close DB scheme and start generous new DC scheme: The proposal is that the final salary-type pension scheme will close and all workers will be moved into a new pension arrangement. This will be a Defined Contribution scheme, which means the employer no longer shoulders the risks involved in long-term pension provision. The terms of the new scheme, negotiated hard by the unions, are relatively generous. They will offer up to a maximum 10% employer contribution with 6% from employees. The legal minimum is far lower (currently 1% each from employer and employees, rising to 3% from employer and 5% from employees by 2019).
But not clear what happens to existing British Steel Pension Scheme – still waiting for Consultation Response: It is not clear, from today’s releases, what will be happening to the existing final salary pension scheme. Will benefits be reduced by going into the Pension Protection Fund? The Government consulted earlier this year on changing the law to force through significant cuts to the full benefits promised to current and past workers. For Government to do this, for just one scheme, would have set a very dangerous precedent for all other private sector schemes. We still have no confirmation of what will happen, even though it was rushed through as an emergency measure during the Referendum campaign last summer. We still do not know when there will be an official response to this consultation.
Probably still negotiating with the Pensions Regulator – will scheme enter the PPF?: The fact that there has been no announcement from the Government, and the wording of the statements today from Tata and the unions, suggest that no resolution for the British Steel scheme has yet been agreed. The wording used is that the scheme will be ‘de-risked’ and ‘de-linked’. This could mean that the scheme is heading for the Pension Protection Fund after all, but the trustees may also still be negotiating for a different outcome.
RAA would allow business to separate from pension scheme: The Regulator does have the power to permit Tata Steel, the employer, to keep running the Port Talbot blast furnaces, but without the burden of the DB pension scheme – and the scheme would enter the Pension Protection Fund. This could represent the scheme being ‘de-linked’ and ‘de-risked’. Such flexibility for employers who are in trouble is a long-standing feature of our pension system. It helps firms who genuinely cannot afford to meet their pension liabilities but want to preserve jobs and keep the business going. To allow Tata Steel to continue running the steel business but not have to support the old pension scheme would require a deal with the Pensions Regulator and the PPF Lifeboat Fund, an RAA or ‘Regulated Apportionment Arrangement’.
Or will Regulator allow a standalone scheme: However, there is also a suggestion that the trustees are still looking for the scheme to be allowed to run on as a standalone scheme without actually going into the PPF. This was the original premise of the Consultation but would require huge reductions to past benefits and would also involve ‘de-linking’ the scheme but it is unlikely to be completely ‘de-risked’ since the trustees would still need to earn investment returns over time to help meet the liabilities. It could be a very different outcome for members from PPF entry and was another of the options suggested in the Consultation. This would mean the scheme may not enter the PPF, but would stay outside it, with the trustees continuing the run the scheme on a low-risk basis, trying to ensure it has enough money to pay the pensions as they become due. Whether or not they would be able to pay full benefits, or reduced benefits may also be part of ongoing discussions.
Key question – what will happen to guarantees given by Tata Steel to £15billion pension scheme?: The future of the British Steel Pension Scheme may lie in the hands of the Pensions Regulator and the PPF – unless the Government does actually tear up pensions law for Tata – this seems less likely. Which outcome is achieved, will also partly depend on what happens to the generous guarantees that Tata Steel has offered to the pension scheme in the past. It has been reported that a share of Tata Steel assets were pledged to the scheme trustees instead of pension contributions, in order to improve the deficit position of the scheme in past years and to provide extra funding if the scheme was in trouble. If those assets are included as part of the pension assets, then the trustees may believe they have enough money to run the scheme on a self-sufficiency basis. It may also, however, be part of the negotiations with the PPF and Pensions Regulator in order to agree an RAA deal. Such negotiations are always complex and we await further details with interest.
So it’s great to see jobs secured and we await further details about the future of this major UK pension scheme. The Pensions Regulator must ensure that it does its best to protect the PPF and the integrity of our pension system.
December 7, 2016 Leave a comment
23 November 2016
- Autumn Statement is missed opportunity to address social care crisis
- State Pension triple lock seems under threat
- Chancellor confirms intention to ban pension cold calling
The Chancellor’s Autumn Statement had no real surprises for pensions or savers. There are some tweaks to pension rules, but the biggest disappointment for me is that there is no acknowledgement of the social care crisis. The Chancellor started by saying the aim of his budget is to prepare and support the economy for a new Chapter. Part of this new chapter includes the aging of our population. This is a huge social issue as baby boomers reach their 60s and are heading for longer lives than previous generations.
I’m delighted to see a greater sense of urgency for new infrastructure and housing investment, this is vital for the future success of our economy. I hope that our own long-term domestic investment funds – in particular pension funds and insurance assets – will be brought into Government to ensure they can participate in such investments. However, it is really disappointing that there were no new savings incentives to help families set money aside for social care and not enough extra public funding to ensure decent care can be delivered to those elderly people who are currently denied the help they need.
Here is a summary of the measures and my thoughts:
- Chancellor has not recognised the scale of the challenge the country faces in social care
The Chancellor has missed an opportunity to really signal that the Government cares about the social care crisis. The country has no money set aside for elderly care – families do not even know that the NHS cannot be relied on to provide care. The NHS will step in under some circumstances, but most families will find that they have to fund care themselves. If they don’t have any savings, then they will be at the mercy of cash-strapped councils who are cutting back care provision and provide only a bare minimum. New savings incentives for social care are needed urgently, not just to ensure at least some families will save for care, but also to help people realise that they need to think about this. The NHS does not and cannot look after increasing numbers of older people from cradle to grave. In an aging population where it is estimated that over 1million older people who need care now are not getting it. Without more funding this can’t be delivered. Allowing councils to raise an extra £2billion in council tax for care by 2020 is simply not enough. The needs are higher than that already and the problem is only getting worse. Employers could be incentivised to help workers with care savings plans, perhaps with elderly care vouchers but currently there is no help at all for employers or employees to provide for future care needs. This will have spillover effects on our precious NHS, because we can’t cut social care without hitting NHS. So taxpayers will keep having to put more money into the NHS if there is not extra funding for social care.
- Good news for pensions – Government will consult on banning pension cold calling and further measures to crack down on pension scams
It is great to see that the Chancellor has confirmed he will consult on banning all cold calling for pensions and also look for other ways to clamp down on pension scams and frauds. This is most welcome. By making pension cold calling illegal, it will be much easier to help people understand that those who do contact them out of the blue about their pensions are acting against the law. We must do as much as we possibly can to protect people’s precious pension savings.
- Triple lock looks under threat beyond 2020 – watch out for more developments
The Chancellor’s speech signalled pretty clearly that the State Pension triple lock is only safe until 2020. He talked about the need to adjust to rising longevity and alluded to a review of State Pension uprating. Currently, the law only requires Basic State Pensions and new State Pension to be uprated in line with earnings after 2020. I would like to see a double lock announced, whereby State Pensions would rise in line with either earnings or prices. Currently, the Additional State Pensions only rise in line with prices. Perhaps the Government could consider increasing all aspects of state pensions in line with a double lock to simplify the system.
- Reduced Money Purchase Annual Allowance cut from £10,000 to £4000. Why not to £3,600?
The Chancellor will reduce the amount of new money someone over age 55 can contribute to a pension after they have already taken some money out of past pension savings. Currently, those who have already taken money out of their pensions under so-called ‘flexible access’, can put a further £10,000 a year into new pension savings and get tax relief on that. The Chancellor plans to reduce that to £4,000 a year instead. This will raise revenue for the Treasury, but it does seem a shame that he did not decide to just reduce the new MPAA to £3,600 a year, which would align it with the maximum amount that non-taxpayers are allowed to pay into a pension with a 25% bonus of basic rate tax relief being added.
- Encourage British pension funds and insurers to invest in infrastructure and social housing
The Chancellor has announced that it will extend the UK Guarantees Scheme for infrastructure bonds and loans and that it is working with ‘industry’ on construction-only guarantees. I do hope the new Ministerial group on delivery of infrastructure projects will work closely with UK pension funds and insurers so that British people’s pensions and long-term savings can help fund long-term improvements in the British economy
Good news for savers:
- A new 3-year NS&I savings bond with market-beating interest rate of 2.2% from next Spring
It is really important to encourage more people to save and these bonds will be of some help to savers who have lost out from Bank of England’s policies. The Chancellor plans to bring back the special savings bonds that were offered to the over 65s before the 2015 General Election. This will allow anyone over age 16 to put up to £3000 into a new National Savings and Investment product that will pay 2.2% interest. It will be available for 12 months from next Spring. This will help some savers who have suffered so much for exceptionally low interest rates. There are already tax breaks for savers, who can earn up to £5,000 a year in savings income tax free but the interest rates on savings accounts have fallen so low that savers need more help.
November 23, 2016 Leave a comment
20 November 2016
Hope Chancellor’s Autumn Statement will address
one of biggest social issues of our time
- Philip Hammond needs to introduce incentives to help people prepare for care
- Massive failure of political courage by previous Chancellors and a betrayal of British families
- Britain has been sleepwalking into a social care crisis – it’s time to wake up!
- Billions set aside for pensions – but virtually nothing to help fund later life care
Let’s have Care ISAs, employer care saving plans, eldercare vouchers
- Politicians have failed to plan for population aging and rising life expectancy – even though it’s been happening for decades. We’ve had reviews, scandals, exposes, recommendations but still no proper funding plan
- Care has been left to cash-strapped councils keep who keep cutting provision
- There has been lots of focus on pensions, but nothing for pre-funding of social care
- Chancellor should introduce incentives to help families to save for social care, rather than leaving them in the dark about the costs they may face
- Chancellor could also incentivise employers to help with social care with tax breaks for care saving plans or elder-care vouchers
- Politicians have adopted the ‘ostrich approach’ burying their heads in the sand and leaving future Governments to deal with the problems caused by today’s lack of action
- Social care for older people is pushing NHS to breaking point – and that’s before the baby boomers start needing care in coming years
- The NHS was designed as a make you better service, not a look after you for ever service – it cannot keep picking up the pieces of our broken care system
There’s no magic silver bullet to solve care inadequacies – having been left so long it needs multiple approaches.
Will Philip Hammond be the first Chancellor to introduce tax incentives to help families prepare for care costs in advance? He could show huge political courage by starting to address this enormous crisis. Signalling to families that millions of them will need some money in later life to pay for care needs, not just pensions, should have been done years ago, but successive Governments have failed to offer any help to families to prepare for care. Government spends billions on private pensions tax breaks, and there is a State Pension to provide a base level of support. But there are no incentives to set money aside for care costs. The Autumn Statement could introduce new initiatives giving tax breaks to encourage people to allocate existing or new savings for care. This would help more people recognise the need to keep money back for later life care costs. Currently, they don’t know.
- Special ISAs for Care Savings: Chancellor could introduce a new type of ISA to help people save for care and could encourage people to switch existing ISAs into Care ISAs. Perhaps up to £50,000 per person which would get an added Government bonus if the money is earmarked specifically for care. The money could perhaps be passed on free of Inheritance Tax to form a Care Savings ISA for the generations if not used.
- Family Care Savings plans: Baby boomers are now reaching their 60s, but have no idea they may face shocking costs of later life care. Encouraging families to save for care will help explain to families that Government won’t cover most care costs: The NHS is already at breaking point as it picks up the pieces of our broken care system, and that’s before huge numbers of baby boomers, now in their 60s, start needing care in future. Government could offer tax incentives for ‘family care savings plans’.
- Tax incentives to keep some money in pensions, such as tax free withdrawals for care: Many baby-boomers have money in their pension funds and now have more freedom to leave their money invested, rather than buying an annuity. The Chancellor could allow tax-free withdrawals from pension funds if the money is spent on care.
- Tax incentives to encourage employers to help staff save for later life care: A pension is not the only money you may need in retirement. Encouraging employers to contribute to a care savings plan for their staff, with similar tax breaks to pensions, could help people build up funds for later life care.
- ‘Eldercare’ vouchers to help staff with care costs: Employers could offer elder care vouchers (along the lines of childcare vouchers) which get tax relief as an employee benefit.
- Stamp duty breaks when older people downsize their home: Government could help ‘last time buyers’ downsize their home. Perhaps with a one-time stamp duty exemption on last home purchase. This could free up some money that could be spent on care in future years.
10 failings of social care:
- No financial or tax incentives to help families prepare for care costs in advance: There are significant incentives to help people build up private pensions, but no Government incentives for care savings. There is employer help for pensions and also the state pension to provide a base, but there is nothing for later life care needs.
- Triple cutbacks in publicly funded care is betrayal of British families – It is estimated that 150,000 fewer people are receiving help at home than five years ago as councils impose triple cutbacks: (a) only paying for those whose care needs are already substantial; (b) cutting the amount of care provided per person (such as 15 minute visits); (c) failing to pay the full costs.
- Health lottery – depending on what’s wrong with you, taxpayers may pay all your costs via the NHS, or none if your care needs come under council control. Most people assume the NHS looks after elderly people but they are often left to pay for care themselves.
- Postcode lottery – Many councils are cutting back care spending, leaving care homes or domiciliary care companies unable to cover their costs.
- Social care is the meanest of all means tests, and families with savings face a double hit – councils will only pay for care if people have less than £23,250. This could include the value of their house, unless they or their partner is still living there. While those with no assets get care costs covered by council taxpayers those people who have to pay for their own care are hit twice. Councils are not paying enough to cover the costs of care for those who do get public funding, so those who get no public money must not only cover their own cost, they also have to pay extra for other people’s care too, to make up for council underfunding.
- Government hasn’t told the public about the need to prepare for care costs – Government has tried to pretend it is sorting out the problem when in fact the crisis is getting worse. Families are being left to find funds when needs suddenly arise rather than having to prepare for care in advance. Political spin is does not help those in dire need.
- Lack of cross-Departmental approach – addressing the care crisis will require several Government Departments to work together – Department of Health, DCLG, Treasury and Housing. The NHS should work with DCLG to properly integrate funding for health and care needs of rising numbers of older people. Treasury must urgently introduce incentives to help families save for care. Housing Ministers must ensure building of suitable homes for ‘last time buyers’ to downsize to. If people stay in unsuitable homes, rather than being able to move to good quality, smaller, user-friendly housing, they are more likely to need social care.
- Lack of integration between health and social care services leaves the NHS paying for those who develop health needs due to lack of care – In Torbay and South Devon, the integration of health and social care has seen emergency hospital admissions for the over-65s almost eliminated. But in most other areas, failure to fund social care, often results in older people ending in the NHS – the most expensive care setting.
- No incentives for councils to save money to NHS – The current system actually incentivises councils to push extra costs onto the NHS. The longer councils can delay hospital discharge, the less they will have to pay for an elderly person’s care. This ends up costing the taxpayer far more, as well as being worse for older people. This failure is leaving NHS resources stretched to breaking point, a lose-lose situation for us all.
No incentives for NHS to save money to councils e.g. GPs could help patients by recommending preventative measures –currently GPs are not incentivised to prevent care needs, rather than waiting to treat them after problems arise. It could save money and improve people’s lives if GPs could recommend personal alarms, handrails or a bit of home care.
November 20, 2016 2 Comments
19 November 2016
- Treasury set to ban pension cold calling in Autumn Statement
- Well done Philip Hammond – this is a great start to help clamp down on scams
- Clear signal for people that such calls are illegal so they should Just Hang Up or delete email
- Further measures to stop scam schemes setting up and clamp down on transfers also welcome
- We must do all we can to protect people’s precious pension savings and this is a positive step
The Chancellor is going to announce that pension cold calling is to be made illegal. He may also be announcing additional measures to help protect customers, by making it harder to set up scam schemes and to transfer money into them.
Well done Philip Hammond – we have to do whatever we can to protect the public against fraudsters. Vulnerable elderly people are being called and offered free ‘pension reviews’ which lead to them losing their entire life savings. We need to be able to give the clear message that if someone contacts you out of the blue about your pension, they are breaking the law, they are criminals. By making cold calling illegal, it is much clearer for the public that they just should not engage with such people.
So far, the government has tried a number of initiatives, such as Project Bloom, Project Scorpion, Action Fraud and cross-Departmental taskforces that aimed to warn the public and catch the fraudsters. Unfortunately, the Government admitted in response to Written Parliamentary Questions that nobody has been convicted and only a handful have even been charged. The current indirect approaches are very well-meaning, but just don’t work for the people who need protecting.
A ban on cold calling is obviously not going to stop all scams, but it gives people a fighting chance of recognising the dangers before they engage and also ensures that we can give the public the clear message that such approaches are dangerous and should be avoided at all costs.
Ideally we would want to find ways to stop pension firms transferring people’s pensions into scam schemes, however that is far more difficult. A ban on cold-calling is something that can be done more quickly.
I worked hard as Minister to try to achieve this and am delighted to see it looks as if this will finally happen. Officials and other Ministers tried to caution against banning cold calls because they did not want to stop bona fide businesses being able to contact customers. That argument is false. No bona fide company should contact people out of the blue offering free pension reviews or investment schemes for their pension savings. If a firm wants to generate new customers, they will have to find better ways than just buying up lists of contact details and cold calling people.
A number of advisers have set up a petition which has helped to focus attention on this issue and the media has been great in supporting the ban on cold-calling.
A victory for common sense and for customer protection. Well done to all.
November 19, 2016 1 Comment
14 November 2016
LIFETIME ISA TO BE NEXT BIG MIS-SELLING SCANDAL – CHANCELLOR MUST THINK AGAIN
- Providers beware – don’t sell this product carelessly, it could come back to bite you!
- FCA rules should require advice, suitability checks and risk warnings before providers sell this
- Pensions are best for retirement saving – right behavioural incentives to keep money for old age
- Lifetime ISA could snatch defeat from the jaws of victory as pension coverage rises
- Lifetime ISA won’t last a lifetime – and may confuse younger people into opting out of pensions
- Greater risk of later life poverty for today’s younger generations who spend all LISA at 60
I am calling on the providers to wake up to the risks of selling Lifetime ISAs to people who would be much better off using pensions for their retirement savings. I hope that the Chancellor will recognise these risks and make changes in the Autumn Statement. We should not confuse people about the best way to save for retirement – pensions are unquestionably the best for the vast majority of people. If the Treasury does not understand the risks, then I hope the FCA will clamp down on how these products are sold, to make sure there must be careful suitability checks and risk warnings before people lock money into the LISA, thinking this is an appropriate way to save for retirement.
I list here twelve reasons why Lifetime ISAs are a bad idea for retirement saving
- LISAs likely to be new mis-selling scandal waiting to happen – not simple products, need proper risk warnings and suitability checks: LISA must not be sold carelessly. The FCA and providers should recognise need for proper risk warnings and adequate suitability checks. Without proper safeguards for consumers, this is a major new mis-selling scandal waiting to happen, when workers wake up to the fact that they are much worse off than they would have been in a workplace pension scheme. Will they complain to their provider or their employer? We don’t know, but it is clear that those who opt out of workplace pensions, or give up an employer pension contribution or lose out on higher rate tax relief will be worse off with a LISA than a pension. Even those who don’t give up an employer contribution could be worse off. If this product is sold carelessly and they don’t realise this, they will have valid reasons to complain in coming years.
- People likely to have less money in retirement as a result of the Lifetime ISA: LISA will see lower contributions going in, lower investment returns, some withdrawals along the way. The amounts of money going into LISA will be lower than if workers put the same amount into a pension. This is because at best they only get the equivalent of basic rate tax relief, they will not have an employer contribution, they will lose any National Insurance relief or higher rate tax relief they could get on pension contributions, more is likely to be saved in cash giving lower long-term returns, charges may be higher than pensions as there are no controls on the Lifetime ISA charges and they may spend the whole lot at age 60.
- Snatching defeat from jaws of victory as Lifetime ISAs will confuse workers about how best to save for retirement: As auto-enrolment is bringing millions more people into pension saving, and opt out rates are low, it is clear that workers have welcomed being put into pensions by their employer. This is a real success story, but we may be about to snatch defeat from the jaws of pensions victory. If people hear about Lifetime ISAs and don’t understand the benefits of pensions, they may be tempted into opting out of a workplace pension and using a LISA instead. This will leave workers worse off in later life and at much greater risk of poverty in old age than if they saved in a pension.
- Lifetime ISAs will not last a Lifetime – behavioural incentive is to spend all money at age 60: The LISA has major incentive to spend the entire pot around age 60, which means having nothing left in your 80s. This is not a sensible retirement saving structure! The point of retirement saving is surely to make sure future pensioners in decades to come will have money to live on, in excess of just state benefits, when they reach much later life. A pension incentivises people not to spend the money too soon, since pension freedoms mean they will pay large amounts of tax if they take too much out, whereas it can pass on tax free now that the 55% death tax charge has been abolished. Incentivising spending the money too soon is classic irresponsible pension policymaking, leaving future Governments to clear up mess created by today’s policies.
- Lifetime ISAs cost today’s taxpayers billions of pounds while still leaving a future Government to deal with millions of poor pensioners who spent it all too soon: Today’s taxpayer subsidy is forecast to cost billions of pounds, but this public money will be wasted if future 60-somethings just spend the whole lot as soon as they can because it’s tax free and because they fear a future Government will tax the money. Giving taxpayer help for house purchase is fine, but let’s focus the retirement saving help on pensions, rather than confusing people with a new inferior product.
- Less money will go into LISAs than pensions: Upfront tax incentives for LISA are no better, and will generally be much worse than for pensions. Partly because the 25% is only the same as basic rate tax relief, partly because there is no employer contribution, partly because people will lose any National Insurance relief and of course people may not trust a future Government to keep the money tax free and therefore contribute less.
- Less money will build up over time than with pensions: Lifetime ISAs will see less money building up in long-term savings than would be the case with pensions. This is because there is no employer contribution, there is no higher rate relief (the 25% is the same as basic rate relief which is the minimum available to pension savers), partly because more will be held in cash and partly because some people will have taken money out along the way.
- 5% penalty on Lifetime ISA withdrawals will drain people’s resources: The 5% penalty on withdrawals is draconian – especially as we are about to cap exit penalties on pensions at 1%! We have seen with 401Ks that many people simply take money out because they can and therefore less is left for later life. A retirement saving product is best left alone till retirement, and ideally needs to last until your 80s or 90s. Pensions are far better for this than ISAs.
- Pensions are more likely to last a lifetime than Lifetime ISAs. With no inheritance tax to pay on money passed on from the pension, and no 55% death tax charge, it is safe to keep the money for later life. However, with an ISA, people will want to spend the money sooner while it is tax-free and there is no ‘brake’ on spending it too quickly.
- Lifetime ISA could help first time buyers, but we already have HelpToBuy ISA so why confuse ISAs with another product? Those saving to buy their first home can benefit from using a LISA, but there is already a Help To Buy ISA for that purpose. We do not need to confuse the ISA brand with yet another product – it is better for people to keep this simple and separate.
- Lifetime ISA will be great for wealthy people – but are they the ones who need further taxpayer subsidy?: Many people wanting to buy Lifetime ISAs will already have filled their full £40,000 annual allowance, or Lifetime Allowance. Some IFAs have wealthy clients who are eager to take advantage of the generous taxpayer subsidies as another tax-incentivised savings vehicle for their children or grandchildren. But is this a sensible use of taxpayer subsidy? Those who most need retirement savings will normally be better off using pensions – do not need another product to confuse people, or cost more taxpayer resource.
- Most ISAs are held in cash with lower long-term returns but no controls on charges: Cash savings can be fine if you’re saving for a house or other defined nearer term goal, but for retirement saving the best investments are longer-term investments that have better growth potential and should give more money for pensions in later life. People may end up with relatively high charges for this complicated product while saving in cash.
November 14, 2016 1 Comment