Category — Pensions
20 February 2017
- DWP seems rather complacent about sustainability of UK Defined Benefit pension schemes
- Nearly 90% of schemes are closed and Government needs proper planning for members in future years
- Burdens of Defined Benefit schemes will increasingly put younger workers’ pensions and jobs at risk
- Using annuity costs as a yardstick is unreasonable, unaffordable and unsustainable for most schemes
Complacency based on short-term view: The DWP has today produced its long awaited Green Paper on the affordability of Defined Benefit pension schemes. The document is a wide-ranging roundup of the issues impacting employers and pension scheme trustees in light of large deficits in most UK DB schemes. The overall tone of the paper is based on an assumption that there is no real crisis in pension affordability and that employers can generally afford the liabilities they are sponsoring. This complacency reflects short-term thinking, whereas this Green Paper should be an opportunity to plan for the longer term outcomes for members of such schemes.
Government should be planning for medium-term risks now as schemes in run-off: From a medium-term perspective, it is clear that the Government needs to put plans in place to manage the run-off of Defined Benefit pension schemes. Nearly 90% of all schemes are now closed to new members, more are closing all the time and once the scheme has closed to new members, it is effectively in run-off. It is only a matter of time before it closes to new accruals too. If we wind forward a few years, it is clear that fewer and fewer workers will actually be in these pension schemes and employers will be sitting on a legacy liability that has nothing to do with their business at all. It relates to people who will no longer be working for them and they will have little or no business interest in supporting the scheme. This will entail greater risks to the PPF. Any period of economic weakness is bound to lead to greater sponsor insolvency and we should be planning for such problems now, as it will take some time before arrangements can be agreed and established. Ongoing support for DB schemes will increasingly damage younger workers’ pensions and job prospects.
Younger workers’ pensions and job prospects damaged: The ongoing Defined Benefit pension schemes will also increasingly make workforce rewards inequitable, with the older, longer-serving workers who may still be in the DB scheme having far better pension benefits than the younger, newer employees who will have DC pensions with lower contributions. The Green Paper suggests the cost of pension accrual for a typical UK DB scheme has risen from around 24% of salary in 2009, to around 50% of salary in 2016. Average contributions to DC schemes are nowhere near these levels. The greater the cost of supporting the legacy DB scheme, the lower the resource potentially available to pay into younger, newer workers’ DC schemes. This is bound to lead to tension, with employers looking for ways of removing responsibility for these legacy liabilities. It is highly likely that employers will simply not be willing to support such schemes in the longer term, so a plan is required for managing the pension payments in the longer term.
Consolidation is one solution that makes sense: Establishing a Central Discontinuance Fund or ‘SuperFund’ that can pool many schemes together, reduce running costs and take advantage of more diversified asset allocation would cut costs and enhance potential benefits. Local Authority schemes are already being required to merge their investment allocations – such models could be used for private sector schemes in future too.
Broader asset allocation is still needed – Myners Review called for this in 2000!: The Green Paper is right to call for broader asset allocation strategies and greater exposure to alternative asset classes. It is rather ironic to see this discussed today, in light of the fact that I first wrote about this when helping set up the Myners Review for the Treasury in 2000. Pension changes seem to take an inordinately long time.
Relaxation of annuity requirements would help: The Green Paper does not sufficiently explore the need to relax the requirement for schemes to buy out benefit in the annuity market. Annuity purchase is punitively expensive for most schemes, the current interest rate environment had increased the costs significantly and there is simply not enough volume in the annuity market for all schemes to buyout anyway. It is time to set up an alternative self-sufficiency regime, that does not require annuity purchase.
Overall, the Green Paper will generate useful debate, but the need for action is greater than suggested by this paper. Many employers are struggling with DB scheme costs and as we leave the EU, British businesses will have many other issues to deal with. A system that helps them manage legacy liabilities is needed for the coming years.
February 20, 2017 No Comments
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 No Comments
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
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 No 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
6 November 2016
State Pension should move to a double lock from 2020 – 2.5% guaranteed rises make no sense
- Triple lock was introduced for political reasons but 2.5% inflates long-term costs
- Double lock can protect pensioners properly against rises in earnings or prices
- Must not increase means-testing of State Pension as that would undermine private saving
The State Pension triple lock is promised until 2020 – after that, the law only requires earnings increases. However, because the triple lock is currently in place, promising to increase parts of the state pension by the best of rises in prices, earnings, or 2.5%, the OBR official long-term forecasts for state pensions spending assume the triple lock remains in place for ever. This adds hugely to forecast costs.
Triple lock has been used by politicians and Government to cover up pension policy failures: I discovered, as Pensions Minister, that when people raised problems about any aspect of pensions policy, the official reply was that the Government had the triple lock. That was supposed to be the catch-all phrase that proved the Government was unquestionably looking after pensioners properly.
In fact triple lock only applies to selected parts of the State Pension, not all of it: The triple lock has, of course, done a good job in many ways, but it applies only to the basic and new State Pension levels, and not to other pensions and pensioner benefits. State Second Pension, Earnings Related State Pension, disability, war veterans and widows benefits, carers’ benefits are all only linked to prices. In fact, these pensions were frozen last year and had no rises at all. Pension credit is only linked to earnings (although the Government has in fact increased it by more than earnings in most years recently).
We must protect pensioners but also consider inter-generational fairness: My position is that we must protect pensioner incomes. The triple lock has fulfilled a useful purpose in boosting the level of the state pension, but a double lock for the long-term would offer pensioners proper ongoing protection, better than earnings or prices alone, without the commitment to a 2.5% figure that is unrelated to the economy or society. Government needs to consider inter-generational fairness and long-term costs.
2.5% is an arbitrary number: The triple lock itself is really a political construct. The 2.5% makes no economic or social 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.
As Pensions Minister I suggested a double lock from 2020 onwards: Last year, as Pensions Minister, I proposed that Government should commit to moving to a double lock after 2020. Currently, the law only requires rises in line with earnings, but using a ‘double lock’ would ensure the state pension rises in line with either earnings or prices each year, to protect pensioners against future rises in prices or national earnings levels.
Double lock protects pensions relative to the economy and society, better than just earnings: A double lock would guarantee state pensions would not fall behind the cost of living or the rise in average earnings, and would protect pensioners relative the rest of the economy and society. This would give pensioners better protection than other groups, which is right, but it would not ‘bake in’ the 2.5% figure that is not related to any economic or societal yardstick.
Nothing to stop a future Government giving more than 2.5% or more year by year: The double lock does not preclude higher rises if the Government of the day wants to offer more 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.
Double lock helps reduce long-term forecast cost of state pension in national accounts: For the purposes of forecasting long-term state pension costs, the triple lock apparently must be assumed to stay in place until there is an announced policy change. The Office for Budget Responsibility (OBR), therefore uses the triple lock for its forecasts, even though legally state pension increases revert to earnings from 2020. A double lock would help take some pressure off the need to increase the state pension age as much as might otherwise be the case because the forecast rise in state pension costs would be lower than if we assume the triple lock stays in place in perpetuity.
Keeping the 2.5% in long-term forecasts could double expected state pension costs: 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 Report also 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 triple lock could more than double the cost of just linking to earnings by 2070.
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. Recent figures on Households Below Average Income, released in June 2016 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 – see page 10 of the Report: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532416/households-below-average-income-1994-1995-2014-2015.pdf
Government must not listen to calls to increase means-testing – it has to be safe to build private savings: The vast majority of pensioners are not well-off. The majority do not have high incomes and the State Pension itself is low – even the new State Pension is only around £8,000 a year. Indeed, the state pension is being reduced for future generations. It is therefore vital that people have private savings as well, or they will have relatively little to live on for the rest of their lives. Having just introduced the new flat-rate state pension, with the state providing just a basic level of income and encouraging people to save privately on top, more pensioner means-testing would be disastrous. It may sounds appealing to say that more help should be given to the poorest pensioners, but that is really saying that those who have saved for their future should be penalised. The long-term result of such policies will ensure more future pensioners will be poor, whereas we need a system in which saving for retirement is the right thing to do. A fair, basic state pension and encouragement of private saving is the best way to manage state pensions for the long-term. Moving to a double lock would help set a stable and fairer base for the long-term too.
November 6, 2016 No Comments
3 November 2016
COME ON SIR PHILIP, JUST KEEP TO YOUR WORD AND PAY UP WHAT IS NEEDED
- Pensions Regulator is right to pursue BHS owners on behalf of pension members
- You don’t tell the Regulator what you think is the right amount, the Regulator tells you!
Two important BHS questions have not been answered:
- Why did Sir Philip not get Clearance before selling BHS?
- How did both he and Dominic Chappell believe the half billion pound pension debt was going to be met?
I am pleased to see the Pensions Regulator pursuing the former owners of BHS on behalf of the Pension Scheme members. If the Regulator believes that the pension scheme was not adequately supported, then it must go after those responsible to recover more money.
They should have obtained Clearance before the BHS sale and should have had a proper plan for fixing the deficit: There are two vital questions that lie at the heart of this sorry saga. Firstly, why did Sir Philip not get Clearance from the Pensions Regulator before selling BHS? Secondly, how did he and Dominic Chappell believe the company was going to pay more than half a billion pounds of pension debt to cover BHS workers’ pensions?
If Sir Philip had obtained Clearance, he could have avoided these problems: We have an established process for companies that want to sell businesses with large pension deficits. You go to the Regulator, you will be asked to provide information and evidence to show the funding of the pension scheme and how you have supported it in the past, and then the Regulator will assess the situation and tell you how much you need to pay in order to meet your responsibilities. Sir Philip originally applied for this Clearance but never went through with the process. It is not clear why. Did he not want to provide all the information asked of him? If so, he has now had to provide it anyway. Did he decide to just take a gamble and hope he could avoid further payments? If that was the case, he lost and should now pay up. In any case, it would be entirely wrong to try to avoid proper responsibility for the pension promises made to BHS workers.
You don’t tell Regulators what you believe is the right amount – they tell you! When I was Pensions Minister, he approached me to try to help him with his pension problems. I refused. He did not seem to understand how the Regulatory system works. The impression I had was that he believed it was up to him to tell the Pensions Regulator how much he was willing to pay, rather than him asking the Regulator to let him know what was the right amount. It seemed he may have believed she was being unreasonable but it is simply not up to him to decide this. The Regulator is the body established to protect our pension system and ensure employers cannot just walk away from their pension obligations.
If he had obtained Clearance it could have cost far less than he will now have to pay: This established mechanism of obtaining Clearance before selling a company with a large pension deficit has been used by many businesses in the past. It allows the Regulator to investigate the pension situation before the business is sold, assess how the owner has supported it up till now, and then decide how much more, if anything, needs to be paid in for the owner to have met its reasonable responsibilities. But in order to do this, the Regulator demands financial information about the past history of the business.
There seems to have been no serious planning by the owners of BHS for fixing the pension deficit properly: The second vital question that remains a mystery is how on earth Sir Philip and Dominic Chappell actually believed this company, with more than half a billion pounds worth of pension deficit, could meet those liabilities. Where was the money going to come from? The workers of BHS had worked loyally for Sir Philip for years, had trusted his pension promises and were relying on him – and any new owner- to ensure their pensions would be paid. Sadly, the owners do not seem to have taken these obligations as seriously as the workers and the Regulator would expect.
The BHS sale documents say the business was being sold ‘debt free’. Does this suggest the owners somehow believed pension debt is not real? When the Work and Pensions Select Committee investigated the BHS pension situation, it uncovered documents that described the sale of the business for £1 as being ‘debt free’. It was as if the hundreds of millions of pounds of pension debt somehow didn’t count! It is now clear that this debt is real and the Regulator is right to ensure that both BHS owners and all other sponsors of company pension schemes understand that they cannot just walk away from pension promises. They have to co-operate with the Pensions Regulator and then pay what is considered a fair sum into the scheme.
Sir Philip said he would ‘sort’ the pension situation – he now needs to put up enough money to do so: I do believe that Sir Philip meant what he said to the Work and Pensions Select Committee and that he wants to deal with the pension debt. However, this is going to cost him a significant sum – and will be likely to cost far more than if he had obtained Clearance in the first place before he sold BHS. He knows that if he just puts in a small sum, the money will not improve the pensions of his former workers. He has to put in enough money to satisfy the Pensions Regulator that the scheme can pay more than PPF benefits.
Paying more than PPF benefits will cost hundreds of millions – but paying less than this will mean members stay in the PPF and the money just goes to the PPF pot: If I were Sir Philip, I would take back responsibility for the BHS scheme and manage it on an ongoing basis to find the best way to meet the liabilities over time. But that will be expensive. This is what he promised Parliament he would do. Putting in a smaller amount than the Regulator requires will just mean members stay in the PPF and any extra money goes into the central PPF pot. To pay better benefits will require a bigger amount of money, but it is up to the Regulator to decide what that amount should be.
Get Real Sir Philip – you should have obtained Clearance and, having not done so, you have ended up with a full-blown Regulatory inquiry and huge reputational damage. The Regulator will now tell you how much you have to pay – it is not up to you, just get on with it.
This document was released by the Work and Pensions Select Committee and suggests the BHS pension scheme seems not to have been considered a ‘debt’ in the negotiations to sell the business. This document skirts over the pension issue as if it hardly exists.
The sale of the business is called ‘debt free’ even though it actually had a £500m debt owed to the pension scheme, i.e. staff, former staff and pensioners! For example, Para 4. states Arcadia Group will ‘deliver the BHS Group on a debt free basis’. Para 13 also says ‘BHS will be debt free on completion’ – again suggesting pension debt is not considered real debt.
The document merely suggests that this could be taken care of with the help of Arcadia paying £5m a year to the trustees. Para 7 states that Arcadia Group will make annual contributions ‘for each of the next three years’ of £5m pa to the pension scheme. The three year period is intriguing. What provision was made for meeting the balance of half a billion pounds of liabilities to the pension scheme members?
Indeed, even this £5m a year contribution is caveated in Para 8. which interestingly mentions that Arcadia would not even put that money in if the new owners make an agreement with the trustees that could reduce liabilities. It requires the new owner to ‘use its reasonable endeavours to reach a settlement, as soon as reasonably practicable, with the pension scheme trustees … following a favourable change in interest rates for instance.’ This suggests Arcadia believed rising interest rates would allow all to be resolved.
There is an intriguing bullet point in Para 16 too. The final point is that there will be agreement from the pension trustees. It says that completion of the deal will be conditional on Arcadia and the purchaser ‘receiving any benefit of any tax or pensions clearances that they feel are necessary prior to completion’ but in the end they did not get Clearance for the pension scheme. Did they consider it was not necessary before completion? If that is the case, why?
November 3, 2016 No Comments
31 October 2016
Nobody likes to hear about pensioners being mugged, or robbed of their life savings. Unfortunately, thousands of older people have suffered such indignity at the hands of pension scammers. It is time the Government took this issue seriously. There are no easy answers, but a ban on cold-calling would certainly help.
Most pension scams start with a cold call, someone phoning or emailing out of the blue, offering a free ‘pension review’ or an exciting investment opportunity that is too good to miss. Soon after that you can find your life savings are gone, and you may even have a large tax bill to pay too. Thousands of people’s lives have been ruined by such scams.
That is why it is so important for the Government to do whatever it can to clamp down on the fraudsters. In the past few years, thousands of pension scam schemes have been reported but no convictions have resulted. It can take years to investigate these incidents, and of course once a scheme is discovered it is usually too late – the pensioners’ money is gone.
We must do more to protect the public and make it much harder for the scammers. As cold calls are such a common way of beginning the scam, let’s make them illegal. After all, if we can ban cold calling for mortgages, why not extend this to pension ‘reviews’ and investments.
Of course this won’t stop all scams. Yes, ideally we should also stop pension companies from transferring money into these scam schemes, but that is harder and at least banning the initial cold call is a start. It would make scams harder and, perhaps most importantly, would send a strong message to the public that such cold calls are dangerous.
It could also be more effective in securing convictions. Proving fraudsters have broken the law by cold calling is pretty straightforward, but convicting someone for a pension scam is impossible in advance – the authorities must wait until the investment has collapsed. By then people’s money has gone so it is too late to actually help. We must do more to prevent the problem, rather than sweep up afterwards.
When I was Pensions Minister, I wanted to do this, but my advice was that making such cold-calling illegal would be difficult – and would not work. I pushed back but officials were always adamant.
Numerous reasons were suggested. I was told the Government does not want to stop bona fide businesses from cold calling people and would prefer to focus only on the fraudsters. This is unacceptable. Reputable companies should not call you out of the blue about your pension. Firms will have to find better ways to gather clients than cold-calling.
I was advised that most scams originate overseas so a ban would not be effective. In fact, the Government does not actually know where scams start and some calls definitely come from the UK.
I was also told we would introduce ‘Caller Line Identification’ so people could track where the calls had come from, but that does not address the problem. We have the Regulator, the Police, the FCA and other agencies all working together to try to address this and also to catch those who are responsible wherever that is possible, but so far to almost no effect.
So let’s just get on with banning these cold calls and give people a fighting chance to fight back. Send a clear message to the public that someone who tries to contact you out of the blue about your pension will be acting illegally and, if you do get such a call ‘Just Hang Up’.
October 31, 2016 1 Comment