Menu Menu


Category — Pensions

Cridland State Pension Age Review

23 March 2017

Cridland Report emphasises importance of working longer but shies away from allowing early State Pension for those who can’t

Summary of my views:

  • Yes it is important to help people work longer, especially after Brexit
  • Yes Government should end the triple lock which doesn’t protect oldest and poorest pensioners properly anyway
  • Yes we must tell people about any increases to their State Pension age
  • Yes adults caring for elderly relatives need more help
  •  BUT I would go further in recognising differential work history and life expectancy by allowing early access
  • Current system helps those who are healthy and wealthy enough to wait longer for State Pension, while giving nothing to those who genuinely cannot keep working

 

  • People under age 45 will get no state pension until age 68.
  • Just increasing state pension age prolongs disadvantage for occupations and regions with known lower life expectancy.
  • I hope this review will help pave the way to end the increasingly unfair triple lock.
Cridland is right to focus on helping people work longer, especially part time: I’m pleased to see the Review suggesting reforms such as later life training, mid-life career reviews and protection for carers, which I recommended as Business Champion for Older Workers. Retirement can be a process rather than an event, with people cutting down gradually rather than suddenly stopping and more help for people to stay in the labour market longer is important.

Brexit makes later working even more important:  We should not force people to stay on and should recognise the wide variations in life expectancy across occupations and UK regions, but as we leave the EU and immigration falls, it makes sense to use older workers’ talents and lifelong experience more.  This can boost the economy and their own future income.

But many people genuinely cannot keep working and State Pension currently doesn’t make allowance for this:  Cridland highlights the vast differences in life expectancy across the UK – more than 15 years differential.  Just as the Review recommends more flexibility is required by employers to facilitate part-time work for older people and help for the increasing numbers of workers who will need to care for elderly relatives, I believe more flexibility is also needed in the State Pension system.

Disappointing that Review decides against early access: People with shorter than average life expectancy generally still pay around a quarter of their salary in National Insurance. They may have worked for 50 years or more but may die before being eligible for any state pension – or may receive very little. This seems inequitable and their lower life expectancy is not recognised by our National Insurance rules. Normal insurance would usually charge lower premiums to such people but that does not happen. Therefore allowing early access could compensate for this even if for a reduced pension.

Current system only helps those who are healthy and wealthy enough to work longer:  If someone can work beyond state pension age, they can get a much larger pension but there is no help for people to get their state pension earlier if, for example, they started work exceptionally young, perhaps in tough industrial jobs, and genuinely cannot keep going till nearly 70.  Cridland recommends some means-tested help just one year before State Pension age but I think moving away from just one ever-increasing age, would be more socially equitable.  A band of starting ages, such as between 65 and 69 with adjusted payments would be fairer.

Spurious accuracy of ensuring receipt of State Pension for ‘up to one third of adult life’: The aim of the Review was meant to ensure people spent ‘up to one third of adult life’ receiving State Pension.  The Government Actuary’s Department figures vividly highlight the difficulties of such a vague target.  Tiny changes in average life expectancy are shown to imply vast differences in timing of state pension age increases.  Between 2012 and 2014, life expectancy fell a little, but that implied a 5-year change in the state pension age timetable.  It does seem that targeting 33.3% of ‘adult life’ or 32% of ‘adult life’ is misleading, given the sensitivity to tiny changes in mortality and huge differences in life expectancy across the population.  A range of ages would surely better cater for individual differences and allow some flexibility.

Problems for WASPI women show dangers of raising state pension age – lessons need to be learned: The Government also needs to learn from the women’s state pension age fiasco that it is essential to ensure people know about any state pension age changes in good time to prepare. Many older women are facing serious hardship as a result of Government failure to communicate with them and there has been no recognition of the damage this has caused so far.

Triple lock should be scrapped – it is a political construct that is increasingly unfair and leaves out oldest and poorest pensioners: I agree with Cridland that the triple lock should be abandoned after 2020. The triple lock is a political construct which purports to offer great protection while increasingly disadvantaging the oldest and poorest pensioners. The lock protects around £160 a week for the newest pensioners but only around £120 a week for older ones and it does not protect the Pension Credit at all which the poorest pensioners must rely on.  The arbitrary 2.5% figure has no economic or social rationale. Cridland suggests linking the State Pension just to earnings but I would like to see some protection against inflation too if that is rising faster.  There is a clear tradeoff between more generous pension increases and raising state pension age.  Having the triple lock in place also puts more upward pressure on the state pension age which itself disadvantages poorer areas of the country and those in heavy manual occupations. So the unfairness and extra cost of the triple lock make it ripe for reform.

 

March 23, 2017   2 Comments

Budget Comments

8 March 2017

Another missed opportunity to start addressing social care

  • No new incentives for social care savings and radical reform proposals pushed into Green Paper later this year
  • No proper help for savers – new NS&I bond pays interest rate lower than inflation, so savers lose money
  • Costs of public sector pensions will rise sharply, by nearly 40% between 2015 and 2020
  • Self employed bearing brunt of tax rises to pay for other measures

Addressing Social care crisis:

  • Extra £2billion for social care will help councils but may not be enough to ensure NHS pressures really relieved.
  • No new help or incentives for families to save for social care or use their ISAs and pensions.
  • More money for councils to cover costs of social care is good, but proper reform delayed – more money is just a sticking plaster on a weeping wound.
  • Will be a Green Paper later this year on radical structural long-term reform. That’s good but needs to be followed by urgent action as care system is breaking the NHS. Integration of health and care, helping families prepare for care costs, finding ways to recover extra money to pay for care – all these are essential as our population ages. The number of people over age 75 will increase by 2million in next 10 years.
  • No help for families to start saving for care – no incentives to help them save even though ‘death tax’ ruled out so can’t take money from their homes or estates.

 

Measures for savers

  • No new help for savers even as savings ratio reaches such low levels
  • New NS&I bond pays only 2.2% interest while inflation forecast to be 2.4% this year and 2.3% next year, so savers lose money in real terms each year

 

Helping people extend working lives

  • The Chancellor has announced £5million extra money for returnships for adults trying to get back into work. This is potentially good news for older people and other adults trying to return to work, especially helping many older women and carers who want to work after taking time out for caring. Of course, more is needed but this is a start. For example, if each returnship costs £250, this can help 20,000 people.

 

Pension matters

Pensions flexibility is raising far more money for Treasury than originally forecast.

  • Treasury expected pension flexibility to raise £0.3bn in 2015-16 and £0.6bn in 2016-17, but people have taken higher amounts out than previously forecast, so actual tax receipts were £1.5bn in 2015-16 and £1.1bn in 2016017. One cannot draw many conclusions from this as we do not know what the people who withdrew money will be doing with it – whether they have other pensions elsewhere and are repaying debts and so on. The Government needs to conduct some proper research into what people are doing when withdrawing pension money. Expected revenues from pension flexibility rules are expected to be £1.6bn in 2017-18 and £0.9bn in 2018-19. Again, we cannot draw firm conclusions without further information.

 

Costs of public sector pensions set to rise sharply.

  • The Budget figures list the costs of public sector pensions as follows. In 2015-16 the cost was £11.3bn but by next year that will have risen by over 20% to £13.7bn. By 2021-22, the cost is forecast to rise to £15.7bn, which is an increase of 39% over the 2015-16 level.
  • 2015-16 £11.3bn
  • 2016-17 £11.5b
  • 2017-18 £12.1bn
  • 2018-19 £13.7bn

 

Overseas pensions:

  • The Government is continuing its clampdown on overseas pensions. Anyone who wants to move their UK pension offshore into a ‘Qualifying Registered Overseas Pension Scheme’ (QROPS) will have to pay a 25% tax charge on the funds transferred, and also any payments made from the QROPS in the first five years after the money is transferred will be taxable in the UK.

March 8, 2017   1 Comment

Despite advances in equality, there’s still huge gender divide in pensions and care

6 March 2017

  • International Women’s Day celebrates women’s progress but more to do
  • Too many women still losing out in pensions relative to men
  • National Insurance still penalises women – including in State Pensions
  • Lower lifetime earnings leave women with lower private pensions too – older women particularly at risk

Older women have achieved improved equality, pay and maternity rights for today’s younger women:  As we celebrate International Women’s Day on March 8th, spare a thought for current cohorts of women coming up to or just reaching retirement.  Throughout their lives, they have paved the way for younger women, as they fought for maternity rights and equal pay, as well as battling gender discrimination in other areas of the workplace.  Female employment conditions are vastly better nowadays than when the babyboomer women were starting out.

But women still losing out in both State and Private pensions:  There remains a significant – albeit narrowing – gender pay gap especially for older women, and one area where all women still lose out relative to men – and always have done – is in pensions.  Women are still very much the poor relations when it comes to pensions. Both for state pensions and private pensions, women’s prospects are worse than men’s.

Mums are supposed to get credit for State Pension when looking after young children:  Mothers who stay at home to look after their young children are supposed to be eligible for credit towards their State Pension, so they do not lose out while bringing up their family.

But new unfairness in National Insurance denies State Pension rights to many women:  In fact, brand new unfairness has recently been introduced into our National Insurance system that will penalise many younger women.  The recent decision to deny Child Benefit to families where one partner earns more than £60,000 has a little-known side-effect of stripping many middle class women of their State Pension entitlements.

Mothers have to claim Child Benefit even though they know they’re not entitled to it: The credit for State Pension is only automatically added to their National Insurance record when they claim Child Benefit.  Those mothers who know they are not eligible for Child Benefit because their family income is above the limit are actually supposed to apply for the benefit anyway, in order to get homecare credit for their State Pension.

If they don’t claim the Child Benefit they’re not entitled to, they can’t backdate it:  Firstly, it seems ludicrous to expect women to apply for a benefit they know they are not entitled to.  But more importantly, if these women discover that they have lost their State Pension credit, they cannot claim it later.  The new rules mean women can only backdate a claim for three months, otherwise that pension year is lost for ever.  If they have not claimed within the three month window and find out about this later, the Government does not allow them the credit.

Classic example of State Pension penalising women and not recognising their lives:  Clearly, the State Pension system is not designed with women in mind.  Women’s lives are different, due to their social and family roles and our pension system must make proper allowance for this.  It’s no use saying they will be credited and then preventing them from receiving the credits with new, complex rules.

Further injustice for low earning women who also get no National Insurance credit for State Pension and Government refuses to help:  There are other ways in which women lose out on their State Pension too.  The National Insurance rules penalise low earners and those with several low paid jobs.  These are predominantly women.  Mothers who stay at home to care for children can get credit to National Insurance.  Those who work part-time and earn more than £5824 a year but less than £8060 are also credited with a year on their National Insurance record, but do not actually have to pay National Insurance.  However, if they earn less than £5824 a year in one or more jobs, they get no credit for National Insurance at all.  The Government has known about this anomaly for years, and has refused to address it.  I tried, as Pensions Minister, to persuade the Treasury to at least allow these women to claim National Insurance credits, or to reduce the minimum earnings level to ensure that those women who are working are not treated worse than those who stay at home.  So far, Ministers have refused.  This is unacceptable.

More women are single nowadays so can’t rely on partner’s State Pension:  As increasing numbers of retired women are single or divorced, they have no husband’s pension to rely on and need their own pension.  So receiving less State Pension is of great concern, particularly as they also have much lower private pensions too.

Lower earnings, interrupted careers, caring duties mean less private pension:  As women are the prime carers for both children and adult loved ones, women’s lower lifetime earnings mean their private pensions are lower.  They are often left out of workplace pensions and have less income to devote to saving.

Auto-enrolment leaves out millions of women:  Even in the new auto-enrolment programme, far more women are left out of workplace pensions than men.  Anyone earning less than £10,000 a year (mostly women) does not have to be automatically enrolled into a pension and will not get the benefit of their employer contribution.  If they are in more than one job, but each pays below £10,000 they miss out altogether on the behavioural nudges that have been so successful in widening private pension coverage recently.  Low earners can request to be enrolled, but of course that is far less likely due to the very inertia that auto-enrolment is designed to overcome.

Older women faced short-notice changes in State Pension age that caused hardship:  Overall, the inequalities paint a bleak picture for women’s retirement income.  The Government also increased the state pension age for older women, giving many of them insufficient time to prepare.

Women continue to struggle to match men financially:  Between balancing their careers, looking after children and caring for elderly parents women are being squeezed from every angle.  Those in their 50s and 60s have particular difficulties, but younger women face penalties too.

Social care crisis disproportionately affects women:  The crisis in social care hits women hardest.  It is wives, daughters and sisters who usually bear the brunt of caring responsibilities, sacrificing their own income for the sake of their loved ones.  This leaves women less prepared to fund their own care needs and women are much more likely to live longer than men and be on their own, so will spend more money on care in later life than men.

Great strides have been made, but big divides remain:  Life in Britain today still leaves women worse off than men, particularly as they get older.  Although women have made enormous strides pushing through glass ceilings in the workplace, the gender pay gap remains and there is still a significant gender divide in pensions and care.  More progress is needed to reduce women’s disadvantages in 21st Century UK society.

March 6, 2017   2 Comments

Brilliant News – BHS Deal Helps 19,000 Members Get Better Pensions

28 February 2017

  • Well done to the Pensions Regulator – £360m deal to support BHS scheme
  • Members will get much more than PPF while Sir Philip pays up for future pensions
  • Regulator has worked hard to secure good structure for the deal as well as significant extra funding

I am delighted that the Pensions Regulator has managed to agree a deal with Sir Philip Green that secures over £360m for the BHS pension scheme and takes members back out of the Pension Protection Fund assessment.  Members should be better off than in the PPF and those with small amounts can choose to take a cash sum up to £18,000 and leave the scheme altogether.

What does this mean for BHS pension scheme?  This deal will bring an end to the uncertainty facing so many former BHS employees, who felt let down by their former owners and were worried about losing their pensions.  They will now be able to achieve more pension than in the PPF.

So what will happen to the pension scheme members? The members should be better off than if they had stayed in the Pension Protection Fund.  Their scheme has been in the ‘PPF Assessment Period’, which means all pensioners and anyone that has reached pension age since the company collapsed will have only been receiving the PPF level of benefits.  Under the new scheme, members will be taken out of the PPF Assessment and receive recompense for any underpayments during the past few months and then move onto the higher benefit levels of the new scheme.

What happens to the BHS pension scheme?  A new scheme is being set up that will run on outside the Pension Protection Fund, but will remain eligible for it and will still pay an insurance levy to the PPF.  The new scheme is expected to be very well funded, now that it will have access to over £360m from Sir Philip Green.  The new scheme will be run by three independent trustees, who have yet to be appointed and they will be responsible for its investments and for paying out the pensions to members.

Will all members go into the new scheme then?  Most members are likely to transfer to the new scheme.  Different categories of member will be in different positions.

  • Pensioners are all likely to transfer over to the new scheme, but if they do not do so, they will stay in the PPF and their payments will continue under PPF rules.
  • Members who are not yet at pension age are also likely to transfer, and will receive more than under the PPF.
  • Members with small pension entitlements under the scheme will be offered a cash transfer if they want it. Those who have pensions with a cash transfer value of up to £18,000, which is likely to reflect a pension income of under £10 a week, will be allowed to take their pension as a cash sum.  They will usually be best to transfer into a new Defined Contribution pension scheme and they can use the fund as they wish once they reach age 55, although keeping it for later life is usually most appropriate.

How will those who are thinking of taking the cash sum know what’s best for them?  The new scheme has provision for all these members to have access to independent financial advice, to help them assess whether they are better off keeping their money in the new scheme and taking a pension income, or transferring out.  For example, if they have plenty of other pension income, they may find the money more useful to them than a small pension, or if they want to pass on money to loved ones or are in poor health, they may feel the cash sum offers them a better option.

How is the new scheme better than the PPF?  In the PPF, members who were not yet pensioners would have their initial pensions reduced by around 10% and would lose all their inflation protection for years before 1997.  In the new scheme, all members will receive their full pension on day one, and will also receive a fixed inflation uplift of 1.8% a year for entitlements built up before 1997.  This is less than the indexation of the old scheme, but much better than the PPF would pay.  The PPF would also cap members’ pensions if they were entitled to large pensions.

Will the new scheme still be eligible for the PPF if it fails?  Yes, the terms of the deal ensure that the new scheme will still pay a levy to the PPF and will still be eligible to enter it in future if the scheme fails.  However, this is not expected to occur as the Regulator believes the extra money being paid to the scheme will leave it very well funded.

How much will the new scheme pay to the PPF each year in levies?  The new scheme may be the first one that will be assessed as a ‘stand-alone’ scheme under new calculations being consulted on by the Pension Protection Fund at the moment.  The PPF is currently consulting on a new levy methodology to reflect the fact that some schemes have no realistic sponsor but are still running on and managing their investment risks and returns to generate the pension payments required over time.

What happens to the Regulator’s investigations into the BHS former owners?  The inquiry into Sir Philip Green and his companies will now end, although there are further investigations into Dominic Chappell and Retail Acquisitions Limited.

Why is this such good news?  This really is a good news story.  I believe it is good for all concerned.

  • The members will get more money than they would have done under the PPF.
  • The Pensions Regulator has demonstrated that it has the power to force employers to pay significant extra sums if they failed to fund their schemes adequately.
  • It is good news for the PPF because the scheme will now no longer need to be supported by it.
  • It is good news for the pensions system because it sends a signal to employers that the Regulator has the power and the determination to pursue employers who underfund their pensions and hopefully it will encourage more employers to obtain Clearance before selling their pension scheme.
  • It is good news for Sir Philip Green as he no longer has the Pensions Regulator investigation hanging over him and has now kept his word to the Work and Pensions Select Committee about sorting out the pension.

It is good news for all pension schemes as it can also help to boost confidence in the regulatory system.

February 28, 2017   No Comments

State Pension Age and Triple Lock

28 February 2017

  • Triple lock will lead to extra unfair rises in State Pension Age
  •  Work and Pensions Select Committee is right to call for earnings and inflation link instead of triple lock
  •  Continually raising State Pension age disadvantages vulnerable older people
  •  Politicians hide behind triple lock but it does not protect pensioners properly anyway
  •  Keeping triple lock in future gives more money to better off and younger pensioners

Raising State Pension Age disadvantages vulnerable groups: Raising the state pension age entails significant unfairnesses that have been underplayed or under-recognised by policymakers. Recent furore over women’s State Pension Age increases highlights the problems this can cause. The state pension age has been increasing because of rises in average life expectancy, however there are huge variations in life expectancy across the country. Those who live in certain regions, people with heavy manual labour occupations, dangerous jobs or on low pay usually have lower life expectancy than the average, so it seems unfair to keep raising the age at which they can start taking their state pension, just because the ‘average person’ is living longer. There is no provision in the National Insurance pension system to recognise lower life expectancy or serious ill-health.

WPSC report suggests abandoning triple lock, so State Pension Age rises more slowly: The Work and Pensions Select Committee has commissioned an IFS report that identifies the problems caused by pressure from keeping the triple lock on State Pension Age rises. https://www.ifs.org.uk/publications/8942 . I believe we have been increasing State Pension Age without thinking about more nuanced and fairer ways of managing the costs of National Insurance pensions and the WPSC report is a helpful addition to the debate.

Yes, Government must protect pensioners: Of course it is important to protect pensioner incomes. However, the triple lock is actually a political construct and fails to offer proper protection. It promises to increase just two parts of the hugely complicated State Pension so that they are guaranteed to rise in line with the highest of earnings, prices or 2.5% under the triple lock. There is no economic or social rationale for this system, the 2.5% is not related to any economic variables and is politically motivated. The longer the triple lock stays in place, the more disadvantaged those who are not covered will become and the greater the pressure to increase State Pension age even further.

Triple lock does not properly protect oldest and poorest pensioners: The only two elements covered by the triple lock are Basic State Pension (around £120pw and received by older pensioners) and the new State Pension (around £160pw but only available to the youngest pensioners). Therefore, the oldest and poorest pensioners are not properly protected. Pension Credit for the poorest pensioners is only linked to rises in earnings. The State Second Pension, Earnings Related State Pension, disability, war veterans’ and widows’ benefits, deferred increases and carers’ benefits are all only linked to rises in prices.

Triple lock has been used to cover up failures in other pension policy areas: Too often, when people complain to MPs about pension problems, the official reply is that the Government has the triple lock so it is unquestionably looking after pensioners properly. This is politically convenient but lazy policymaking and is not being honest with the population.

Keeping triple lock means higher State Pension Age rises which compound unfairness: The Work and Pensions Select Committee’s analysis, done by the respected Institute for Fiscal Studies, confirms that keeping the triple lock for future years after 2020 will cause unfair extra rises in State Pension Age. This is not the best way to manage pension policy in a country with large variations on life expectancy and work history.

 It’s time to consider better approaches to managing state pension costs than just keeping 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.

Consider other factors than just chronological age: 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. Those who are in poor health, have much lower life expectancy or have had very long working lives may need pensions sooner. Making them wait longer before they can get any money at all will feel unfair.

Consider contribution record and flexible age range: A fairer uprating system than the triple lock is needed, that does not penalise the older and poorer pensions. I hope the Cridland Review will be making recommendations in this area. For example, Government should consider perhaps extending the number of years of National Insurance required for a full State Pension, as well as more flexible range of ages than just one starting age. Such changes would help the more vulnerable groups more effectively than the current system.

February 28, 2017   1 Comment

Defined benefit pension schemes Green Paper

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   1 Comment

Pensions are in mortal danger – beware

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

The triple lock trick

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.

NOTES:

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   1 Comment

A pension scandal ruining good people’s Christmas

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

Tata Steel – what happens to the British Steel Pension Scheme?

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