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Category — UK Economy and Economic Policy

Government facing Lords defeat tomorrow over refusal to protect consumers

23 October 2017

  • Government faces Lords defeat tomorrow over refusal to protect financial consumers
  • Hard to understand why Ministers are resisting changes that have widespread support
  • Policy needs action not words – let’s not miss this opportunity to introduce cold-calling ban

Cross-party amendments to Financial Guidance and Claims Bill call for:

  • Ban on cold-calling for pensions
  • Mandatory guidance for pension savers before transferring money out
  • Breathing space to protect people with huge debts (vital as interest rates set to rise)

The Government faces potential defeat in the House of Lords tomorrow evening if it refuses to agree to cross-party amendments at teh Report Stage of the Financial Guidance and Claims Bill.

Ministers blocking measures to ban cold-calling ban and offer breathing space for debts: Having announced it wants to ban pensions cold-calling and introduce breathing space for people with unmanageable debts to help reschedule their payments, it is hard to understand why Ministers are refusing to agree to introduce the necessary legislation in the Bill now going through Parliament. Yet there is widespread support for this ban, across all political parties, consumers groups and providers.

Government says it won’t legislate for years: The Government has so far resisted all calls for these measures to be included in the Bill. Indeed, it has indicated that any legislation may have to wait until 2020. By that time, millions more people will have been plagued by nuisance calls, will be at risk of scams, and may lose their pensions. If the Government is serious about protecting consumers, then it has the ideal opportunity to act now.

Amendments to the Bill will be debated tomorrow with wide support across the Lords: A group of cross-party Peers has worked hard with the Parliamentary authorities to find ways to include these measures in the Bill. We are all concerned about doing more to protect consumers. The amendments would make a significant difference to the public and would pave the way for the Government to actually fulfil its commitments to ban cold-calling, help vulnerable customers and to allow those with big debts to have more time to receive help to sort out their financial affairs.

Ban Cold calling and use of data obtained by cold calling: One of the amendments will introduce legislation that enables the Government to ban cold-calling for pensions. Currently, it is illegal to cold-call about mortgages, but not about pensions. The proposed measures will make it an offence for anyone to make unsolicited approaches to the public about their pensions and will also ensure that the financial regulators have powers to remove the licence to operate from firms who do the cold-calling, or use data obtained from cold-calls.

Mandatory guidance before transferring money out of pensions: The Amendments will also try to ensure further consumer protection by requiring anyone who wants to transfer money from their pensions to have either independent financial advice or to speak to the free national guidance service. This helps to protect people against scam schemes in which they may be enticed into transferring to, as well as ensuring they understand the risks and implications of transferring money out of their pensions. Currently, the take-up of PensionWise is woefully low and people are moving money out of their pensions without realising the tax penalties they will pay.

Customer protection clause and breathing space: We are also calling for a special duty of care for vulnerable customers who need help with their financial affairs, including a breathing space for people with unmanageable debts, so when they approach the Financial Guidance body for help, their interest payments can be suspended for a short period, giving time to reschedule, rather than risking bankruptcy. Especially as interest rates seem set to rise, such protection is vital.

Combining MAS, TPAS and PensionWise into one free holistic guidance service: The Bill has received little attention so far, but is really important. It will merge the existing Money Advice Service, Pensions Advisory Service and PensionWise into one new body, that will offer holistic financial education, information and guidance under one banner. This will be a national service to provide free financial guidance, information and education to the public, to help them manage their money, savings and pensions.

Aim to improve financial capability and help the public make better financial decisions: Currently, many people do not know where to get to get help. There are numerous free services, but their activities are not ‘joined-up’ and many people are confused or simply do not know about the help available. The idea of improving these services is excellent and the Government should be congratulated for bringing forward this Bill. However it must take the opportunity to make the new system work better for the public.

So sad to have to vote against the Government but I am passionate about protecting consumers: I do not want to vote against the Government, but I came into politics with the aim of improving consumer protection and financial education, ensuring customers were treated more fairly by financial firms. This is something I am passionate about and it saddens me that I have had to join with Opposition parties to try to force such measures through, when it is so clear they are important for protecting the public. It is not good enough for Ministers to make promises, when the legislative chance arises we have to take it. Now is the time and I do hope the Government will listen to reason.

October 23, 2017   No Comments

Inter-generational fairness

16 October 2017

  • Don’t punish the old to help the young – panic policy changes have political dangers
  • Let’s focus on policies that are fairer across all age ranges
  • Better to address problems of housing or student debt directly
  • And take the opportunity to prepare for social care costs that will burden younger people

 Don’t repeat Manifesto errors: Today’s newspaper reports of potential Budget measures to please younger voters seem fraught with danger. The suggestion that older people should be punished to provide more money for the young could harbour potentially lethal political damage. The Tories core voters are older people, it would be rash in the extreme to risk alienating them in the coming Budget. The lesson from the Election Manifesto is that punishing the old is not a sensible way to attract younger voters, but is a recipe for losing support of older generations.

Age is not a reliable indicator of wealth, health or ability to pay: Some young people are earning huge sums, some older people are and always have been living on extremely low incomes. Favouring one age group will potentially alienate others.  For example, specially reduced taxes for 20- or 30-somethings will feel unfair to low paid, just-about-managing families in their 40s or 50s.

Housing costs and student debts should be addressed directly: Many of the young are definitely struggling with student debts and also with housing costs (but so are older people). Just cutting taxes for particular age groups will not solve the root causes of the problems. Student debt repayment plans, lowering the 6.1% interest rate and offering shorter university courses would help.

Build more suitable new housing: Britain has not built enough new homes to support its rising population and councils lack sufficient social housing to ensure those who need such accommodation can find it. Also, many older people would like to downsize from a larger family home once children move out, but cannot find attractive new homes to move to. Encouraging more suitable age-appropriate housing, as well as ensuring older people can still access mortgages if they need to, could help housing affordability issues for younger families by increasing supply.

Incentivise institutional assets to invest in social housing: Quantitative Easing has inflated asset prices, including housing, which has also increased rents. The Budget could incentivise institutions to invest in ‘build to rent’ property, at little or no cost to the Exchequer, with time limited availability of landbanks for construction projects of this kind. This could reduce rental costs for old and young and provide better returns than currently available on other assets.

Pensions tax relief reform could offer flat-rate incentives and remove Lifetime Allowance – but now is probably not the time:  Pension incentives of tax relief are extremely complex and poorly understood. In fact, non-taxpayers can receive a 25% bonus on their pension savings, even though they pay no tax, which is a highly progressive measure to help lower earners, who are often younger. People earning over £45,000 receive more than 66% bonus on their pension contributions. This is clearly far more generous than the 25% available for lower earners, but this impact is not determined by age, it depends on your income and is based around the tax system. Reform of tax relief has usually focused on paying the same bonus to everyone, which would boost the incentives and pensions of lower and average earners rather than helping certain age groups. Such a radical change would actually help women more than men, young more than old and low earners rather than higher earners, but would not discriminate by age. A quid pro quo for reducing the taxpayer bonus to higher earners’ pensions could be to remove the illogical lifetime allowance on pension accruals which threaten to punish those whose funds perform particularly well.

Another major inter-generational issue is the crisis in social care:  Currently, younger generations face being burdened by huge costs of elderly care for babyboomers who run out of money by the time they reach their 80s. The Chancellor would be well-advised to introduce measures to encourage older people who do have money in pensions or ISAs or valuable properties, to earmark a specified sum – say £100,000 – that would cover them if they need care. This would be each individual’s maximum contribution towards their care, after which the State would pick up the costs. Incentives to help older people use their pensions or ISAs to build up a later life care fund – by allocating money that could be passed on free of inheritance tax as long as it provided a care fund for the inheritors or withdrawn from pension funds tax-free – would finally start addressing this crisis. Neither Government, nor individuals have set aside any money for care. The longer the Government delays in addressing this issue, the more older people will fail to prepare for the potential costs. Ultimately, National Insurance might help with these societal risks, but there has been a major failure of successive Governments to prepare for the well-known future burden. The costs of care should not be borne wholly by who need it, but every family should contribute to the costs and those lucky enough not to need it will help pay for those who do.

I urge the Chancellor to avoid knee-jerk panic tax changes that could alienate older voters. Let’s focus on policies that are fairer across all age ranges.

October 16, 2017   No Comments

Capitalism is the best system, but has it been undermined by QE

28 September 2017

  • Mrs. May is right – capitalism boosts growth and economic progress but she fails to recognise central banks have distorted capital markets with dangerous political consequences
  •  Government bond markets are rigged in favour of the strong at expense of the weak as QE redistributes wealth away from the young and enriches the wealthiest groups
  •  Central Bank policies have operated as disguised fiscal policy without democratic accountability
  •  Socialism is not the answer – that would make everyone poorer – but we need better policy responses to problems of debt and inequality

The Prime Minister is today speaking at the Bank of England to celebrate its 20 years of independence. But she has failed to recognise the irony of trumpeting the virtues of capitalism in the seat of monetary policymaking which has, for the past ten years, undermined many of the principles on which capitalism is based.

In theory, the central bank operates independently of Government, but in practice, its unconventional monetary policies have acted as a democratically unaccountable arm of the Treasury.

It is understandable that, in the face of the 2008 financial crisis, policymakers were looking for new ideas to save the banking system. They used monetary policy as the weapon of choice, on the pretext that there was no alternative and Japanese-style economic conditions must be avoided at all costs. This view prevailed and the side-effects or long-term consequences of so-called ‘Quantitative Easing’ were not really considered.

As an emergency response, one can understand that this policy had appeal. It could be introduced quickly, would boost capital markets and allow Governments to borrow more cheaply. But the transmission mechanisms for economic revival were not carefully monitored, nor were the damaging side-effects considered seriously.

The fact that QE has turned out to be just a fancy name for ‘printing money’ to finance government borrowing has still not been recognised. Instead of the politicians printing the money, as would be the case in many banana republics, this time is was the ‘independent’ central banks. This gave the exercise an air of respectability and the benefits to Government and financial markets were so enormous that it has been adopted around the world.

Normally, markets would punish countries which just created new money to finance their borrowing, but when all major countries are doing this and the policy enriches financial market players and the wealthiest groups, the capital markets have turned a blind eye to the underlying reality and keep pretending that central banks can just ‘unwind’ QE once it wishes to tighten policy again.

Of course, this is simply not credible. But far from worrying about how to deal with the stock of debt on central bank balance sheets, for the past years they have just kept on creating more huge sums to increase their purchases. Even after the economic emergency has passed, the monetary drug continues to be administered. Talk of ‘tapering’ has already caused market dislocations, but don’t forget that this ‘tapering is only creating less new money’, it’s not stopping the policy, let alone reversing it. The Fed has begun to make noises in this direction, but the scale of the task is so enormous, it’s hard to see how anything meaningful could be achieved without causing market mayhem.

And politicians have bought into the QE story completely. Of course they have, because it helps them so much. Without QE, the cost of borrowing to finance current Government spending would be far higher and politicians would have to make difficult decisions (much harder than the ‘austerity’ that has been so vilified here). They would have to cut spending further, or raise taxes or keep borrowing ever more until the markets lose confidence.

But the truth is that central banks have become an arm of fiscal policy. Buy buying so much sovereign debt, they have allowed policymakers to believe they can afford more spending and lower taxes. The longer QE persists, the deeper the hole is being dug in public finances and the harder it will be to climb out.

But the difficult decisions cannot be ducked for ever. I believe the fallout from the unconventional monetary policies is having political consequences which are now causing a loss of confidence in our entire capitalist system.

Ordinary people have not perceived much benefit from QE. Yet they have seen how it has enriched wealthy groups, boosted asset markets and helped the financial sector. Meanwhile, they have felt the pain of rising rents and house prices, students have been saddled with mounting debts that don’t reflect current low rates, younger workers have been shut out of final salary-type pensions as QE has made them increasingly unaffordable.

Recent political events demonstrate disaffection with conventional politics. The votes for Brexit, Trump, Macron and far-right nationalists in Germany and other EU countries have been a shock to the established order. I think one could argue that the sudden surge in populism represents a loss of confidence in capitalism, economic policy and democracy.

Britain is suddenly engaged in a battle between the hard left and the hard right. It is also facing a hard Brexit. There are no easy choices, but leaving the EU when there is the real threat of Marxist expropriation of private assets and punitive taxes on wealth creation would further damage future generations.

I suggest that unconventional monetary policies may have played a role in the rise of populism and voters’ desire for change. So far, such potential impacts have been ignored. Yet, the side effects of Quantitative Easing (QE), especially after so long, may be feeding popular disaffection with the entire capitalist system. Mrs. May has not recognised this yet, but it would be advisable to consider it.

Capitalism assumes free flows of capital and market forces, to allocate resources and determine outcomes. But global monetary policy has interfered with capitalism as central banks have artificially distorted capital markets, possibly undermining the basis on which the system depends.

QE was introduced as a supposedly temporary emergency experiment to revive growth by lowering long-term interest rates once short rates were approaching zero. Buying sovereign debt with newly-created money pushed up bond prices thus lowering yields. Initially, savers were told they should be grateful for a return ‘of’ their capital, rather than expecting a return ‘on’ their capital. I believe there were alternatives to QE – for example if the Government had decided to take RBS (and possibly Lloyds) into national ownership on a temporary basis, it would have ensured shareholders lost out in the way capitalism intended, rather than being paid by the Government for shares that were effectively worthless. I know this may sound heretical, but it is a sounder capitalist solution than QE has turned out to be. It would also have helped shore up the prudence of the banking sector, when shareholders realise they can lose everything if they allow companies to operate so irresponsibly.

Once in public ownership, these huge commercial banks could have used their nationwide networks and branches to ensure lending reached small businesses across the country and could have been managed by keeping bank staff on, rather than by civil servants. The aim would be to sell the banks back into the market once the economic emergency was over (as it has been for several years) and better protections had been put in place to avoid a repeat of the reckless lending that caused the crisis.

That is of course with the benefit of hindsight, but I was saying this at the time. However the attractions of QE were much greater and Labour was frightened of nationalisation, having spent so many years trying to overcome their leftist image. It is ironic that the fallout from fears of nationalisation has been partially to boost the rise of extreme left Labour. These policies have been roundly discredited in the past and Venezuela is a more recent example of the economic failure of extreme left economics. But with so much anger and disaffection at the status quo, more radical ideas are required.

The Tories really need to confront the problems facing our nation with a better understanding of what has gone wrong. And when will they admit that a ‘no deal’ Brexit would compound the economic catastrophe that seems to be looming.

With or without Brexit, the perils of monetary policy should be recognised. It seems that the drug is so powerful for strong groups that they cannot bear to give it up. But the short-term ‘fixes’ are storing up more problems as time goes on.

The problem for capitalism is that Government bonds are supposed to be ‘risk-free’ assets. As the lowest risk asset class, other capital markets – and models of capital market pricing – use this benchmark. QE has distorted this ‘risk-free’ rate. With a buyer determined to boost the price of these assets, it is no longer a free market. And when bond yields fall sharply, investors need to find other sources of return, which pushes up all other asset prices. Asset prices across most markets have soared.

And the policy has been maintained well beyond the economic emergency. Despite rising growth and employment, global central banks have continued creating more money to buy more and more bonds, thereby artificially distorting capital markets even further for almost ten years. This has benefitted powerful interest groups, which may explain why the policy has been prolonged, but it has also disadvantaged others. With 90% of ordinary people’s savings being in cash or cash-like instruments, most people felt the pain or QE as saving rates plunged, while the wealthiest 10% have benefited enormously from rising asset markets in which they hold much of their wealth.

Artificially boosted asset price increases have negative effects on society, because assets are unevenly distributed. The top 5% of households own nearly half of UK assets and 80% of all assets are owned by the over-45s. So, the wealthiest and older households have become even wealthier, while QE-induced house price rises lead to higher rents, which have further disadvantaged non-homeowners and the young. Such social and distributional side-effects of unconventional monetary policies are under-recognised, perhaps because the policy is so beneficial to Governments, but politicians would do well to consider the potentially damaging political consequences.

In effect, monetary policy has acted like regressive fiscal policy. If politicians announced tax changes to enrich the wealthiest groups and redistribute money away from younger and less wealthy people, there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but it is important to consider the democratic dangers to capitalism which prolonged QE may pose.

Such ongoing redistribution may at least partly explain disaffection with the ‘establishment’ and rise of populism. Many voters have started to realise that something is not quite right, that the economy is not really working well for them, but are not sure why. So they vote for change, anyone that promises different ideas.

Politicians may have started to feel the consequences of such disaffection. But what can they do about it? Asset bubbles have been inflated in many areas, debt levels have risen and consumers are over-extended. Perhaps a dose of ‘people’s QE’ or debt write-off will be needed in years to come.

September 28, 2017   No Comments

Government too complacent on final salary schemes

27 September 2017

  • Three million pension scheme members have no more than 50/50 chance of getting their pensions
  • ‘Superfunds’ could ease pension pressures before more employers become insolvent
  • As Brexit economic and political uncertainty worsens, final salary pensions are more at risk

No room for complacency as closed schemes will need better ways to manage liabilities: Britain’s Defined Benefit (DB) final-salary type pension schemes are under unprecedented pressure. So far, the Government has been rather complacent about the risks, but with the ongoing ultra-low interest rate environment and rising economic and political uncertainty, new thinking is urgently needed.

Millions of members at risk: The PPF estimates 3 million people have no more than a 50% chance of getting their promised benefits, while three quarters of sponsors are facing significant challenges in running their schemes.

Deficits have stuck at £400bn for past ten years, despite £120bn employer contributions: Despite ploughing £120billion into DB schemes to improve funding, the aggregate DB deficits have stayed around £400billion for the past ten years. Employers have been running to stand still and the hoped-for funding improvements have generally remained elusive.

As most schemes are closed, sponsors will soon be desperate to get rid of legacy liabilities: With the majority of schemes now closed, within the next 5-10 years, these sponsors will have no interest in or worker connection with the scheme. 90% of FTSE350 schemes are expected to become cash-flow negative in the next 5 years. Sponsors will look for ways to get rid of this legacy risk, or will go bust, especially if the economy weakens. The Government must plan ahead for this now.

Not enough flexibility – making the best the enemy of the good: Many companies would like to honour their obligations, but in an affordable way. However, the options for employers and members are binary. Employers who can continue in business, must purchase annuities for full benefits before severing links to the scheme. This is prohibitively expensive, especially in the current interest rate environment and it is questionable whether excessively expensive annuitisation is a sensible use of corporate resources.

Pensions can’t be reduced unless sponsor going bust: Quite rightly, employers cannot walk away from their schemes. But once employers are facing inevitable insolvency, benefits are reduced by around 10-20% in the PPF. There is no flexibility for companies which struggle on in business.

BHS and Tata may provide a blueprint for companies which are managing to keep afloat to ‘wind-down’ rather than having to ‘wind-up’: BHS and Tata schemes, however, have been allowed a different option. Their trustees are running their schemes with the aim of paying benefits better than PPF, based on assumed prudent future investment returns, without annuitising. BHS and Tata sponsors paid a premium over the expected future cost of the promised pensions and trustees will aim to deliver promised benefits over time. Using this as a precedent, one can suggest a new option to allow employers to meet their obligations at more affordable costs, without insolvency and without annuities. This is rather like allowing the schemes to wind-down, rather than winding-up and be a model for other schemes.

‘Superfunds’ could help with consolidation: PLSA proposals for ‘Superfunds’ could be helpful in achieving this aim, because pooling schemes will allow reduced costs of delivering the pensions. And allowing employers to rely on future investment returns as well, rather than annuitising, will help remove pension risk from their balance sheet and free them to focus more resources on their business, or improving pension contributions for other workers.

Members have better chance of receiving higher pensions: By offering sponsors a viable alternative to unaffordable buyout, members would have better chances of receiving full benefits, rather than reduced PPF pensions. The idea would be that employers must pay in enough money to meet expected future pension payments, with assumed investment returns over time, plus a capital buffer (perhaps an extra 5-10%). This would be much less than the cost of buyout but would still be expected to deliver full pensions to all members.

Pooling can reduce costs and improve expected investment returns: By joining thousands of small pension schemes together into much larger Superfunds, administration costs would fall. The Regulator estimates average per member costs of administration and advice for schemes with over 5000 members is £87, while for schemes with under 100 members it is £653. Superfunds should also improve investment returns, risk management and governance. Large pools of assets can achieve better diversification and access higher quality fund management, with a larger and broader spread of asset classes.

Superfunds could benefit the economy as more assets invest in infrastructure or social housing: Not only could Superfunds reduce costs of administration, external advisers, legal and accountancy fees, but they would also allow more pension assets to be used to fund infrastructure, social housing or other long-term much needed investments.

Employers could raise one-off loans to pay the pension debt and avoid future profit drain: The employer could perhaps take out a loan to meet the required additional funding of the consolidation scheme, cleaning up its balance sheet and without the same drain on future profits because the debt would be a one-off capital transaction. Once the extra funds were put in, the employer would have no residual liability for members’ pensions.

Standardising benefits could halve admin costs: In order to achieve the necessary cost reductions, it would certainly also help to standardise and simplify benefits. It is estimated that administration costs could be reduced by over 50% if benefits were streamlined.

Win-win for members, employers, economy and younger generations: Such a reform would be a win-win for employers (who can get rid of pension risk more affordably), for members (who would have more chance of getting full pensions) and for the economy (as more money could invest in public or higher return projects) and for younger generations (if employers have more resources to devote to their pensions, rather than buying out members of closed schemes).

September 27, 2017   No Comments

Loss of confidence in capitalism, economic policy and democracy

25 September 2017

Based on my letter published in the Financial Times 22 September.

Recent political events demonstrate disaffection with conventional politics. The votes for Brexit, Trump, Macron and far-right nationalists in Germany and other EU countries have been a shock to the established order. Questions are asked as to whether the sudden surge in populism represents a loss of confidence in capitalism, economic policy and democracy.

Unconventional monetary policies may have played a role in the rise of populism and voters’ desire for change. So far, such possible impacts seem to have been overlooked. Yes, it is possible that the side effects of Quantitative Easing (QE), especially after so long, may be feeding popular disaffection with the entire capitalist system.

Capitalism depends on free flows of capital and market forces, to allocate resources and determine outcomes. The stance of global monetary policy has, arguably, undermined capitalism as central banks have artificially distorted capital markets, the basis on which the system depends.

Following the 2008 financial crisis, central banks introduced QE as a supposedly temporary emergency experiment. Having pushed short-term interest rates down to almost zero, they wanted further stimulus to revive growth. So they decided it might help if they could lower long-term interest rates too. They, therefore, created huge amounts of new money to buy sovereign debt (and other bonds), which pushed up bond prices thus lowering yields.

However, Government bonds are considered ‘risk-free’. As the lowest risk assets, other capital markets – and models of capital market pricing – use this benchmark. Unfortunately, however, QE has distorted this ‘risk-free’ rate, undermining its valuation. With a buyer determined to boost the price of these assets, it is no longer a free market. And when bond yields fall sharply, investors need to find other sources of return, which pushes up all other asset prices.

And the policy has been prolonged well beyond the economic emergency. Global central banks have artificially distorted capital markets for several years, by continually creating more money to buy more and more bonds. This has been very beneficial for powerful interest groups, but has also disadvantaged others.

QE helps Governments borrow more cheaply, thus lowering their fiscal deficits and allowing higher public expenditure. Financial market participants and the wealthiest groups in society benefit from the overall increase in asset prices that QE engenders. But the social, distributional – and political – side-effects of unconventional monetary policies are overlooked.

However, the side-effects of unconventional monetary policies may have fed populism and ultimately undermined confidence in democracy.

QE artificially boosts asset prices but assets are unevenly distributed. 80% of all assets are owned by the over-45s, , the wealthiest and older households become even wealthier, while QE-induced house price inflation and rent increases have further disadvantaged non-homeowners and the young. Such social, distributional – and political – side-effects of unconventional monetary policies are routinely overlooked.

If politicians announced tax changes to enrich the wealthiest groups and redistribute away from young to old there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

Is the populist wave engulfing the West reflecting this? The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but it is important to consider the democratic dangers to capitalism which prolonged QE may pose.

September 25, 2017   No Comments

Manifesto cost May the election

11 June 2017

  • Tory Manifesto cost May the election
  • Social care proposals alienated core voters AND would have made care crisis even worse
  • There is no silver bullet – care crisis needs a range of solutions

The Tory Manifesto was a turning point in the election campaign.  To say the policy announcements on pensions and care were badly thought through would be an understatement. They don’t really seem to have been thought through at all.

The combination of means-testing Winter Fuel Payments for pensioners, with the draconian social care changes, suddenly saw the Tories’ traditional support among older voters waver.

Mass means-testing of pensioners has already been discredited due to the disincentives it poses to private pension saving. To extend means-testing in this arbitrary manner, without consultation and without proper understanding of how the policy would impact on pensioners, was a mistake of monumental proportions. To combine the two, looked like a punishment to families with loved ones who were ill, not just to older people.

This policy proposal is not only politically poisonous, because it hits the very people who are most likely to vote Tory – those who own their own home, or who have built up a nest-egg or some assets to pass on to their loved ones; it also would not solve the social care crisis anyway. All the political pain, for no policy gain. To suggest that the cost of social care could be met by means-testing Winter Fuel Payments is fantasy. And almost immediately, the Scottish Tories announced that all pensioners in Scotland would still get the money, so this was clearly not going to work.

Of course there were multiple issues that played a part in this debacle. Some were due to Labour’s promises of free tuition fees, school meals and higher minimum wages, but others were own goals such as foxhunting, grammar schools and ultra-hard Brexit. Such unforced errors played into the hands of the Opposition parties. But the real killer was social care.

The care crisis has been worsening for years and is in danger of bankrupting the NHS. The Tories are right to say this crisis must be addressed. Clearly, more funding is needed urgently, and the burden will fall on younger generations unless radical reforms are introduced. There is no one silver bullet that will solve this massive problem, but some elements of the solution were already in place. The Manifesto tore those down, rather than building on them.

Legislation was passed in 2014, with cross-party consensus, for a £72,000 cap on lifetime spending on ‘eligible care needs’ for home care or care home costs. This did not include the costs of board and lodging, which would be up to an extra £12,000 a year.

The legislation also increased the means-test threshold from £23,250 up to £118,000 of savings. At the moment, if you have more than £23,250 of savings or assets, you fund all of your own social care. Crucially, though, the value of your home was not taken into account in the means-test if you received home care or if you were in a care home but still had a relative living in your house. Then along comes the Tory Manifesto and proposes something altogether more draconian – suddenly opening up the social care funding crisis as a national political issue.

Instead of a £118,000 means-test floor, the Tories cut this to £100,000.

And this was to include the value of your home in all circumstances. So if you needed homecare, or you were in a care home and still had a partner living in your house, the value of your property would still count against you for council funding. Suddenly, millions more people would be hit by social care costs – most particularly those families whose loved ones had dementia or other conditions that did not count as ‘health’ needs. A millionaire with cancer could have all their care costs paid by the NHS and their house was safe. But an older person with dementia, and a home worth £250,000, would have to pay for all their care until most of their house value was gone.

There are so many reasons why the Tory Manifesto Care reforms were disastrous, not only because they were politically poisonous, but they would also actually make the care crisis worse. Here are some of the major flaws in the proposals.

They would actually worsen NHS bed-blocking:  Effectively, older people who owned their own home would have to pay for leaving hospital. Current bed-blocking often happens when older people stay in hospital until homecare is arranged for them. But if they know the costs will come out of their house as soon as they leave hospital, they and their children will have an incentive to stay in hospital for longer where care is free.

Proposals don’t give councils any extra funding to pay for care: The lack of social care funding, either at state or private sector level, is at the heart of this crisis. No money has been set aside by local authorities, or individual families, to cover elderly care costs. Councils will still need the funding to pay for elderly care and will not know when they will recoup the outlay from people’s homes. Repayment will depend on how long the person lives, and may also involve legal costs to enforce payment from an estate. This leaves current underfunding unaddressed and fails to help councils plan for long-term care.

Will disincentivise saving for care instead of incentivising it: A sensible social care funding policy would ideally encourage people to save to fund their care, similarly to incentives to save for an old age pension. But these proposals will discourage people from bothering to save for care costs as they will lose so much in the means-test.

Would increase strain on NHS: Older people may try to do without the help they require in order to avoid having to borrow against their house. More may then end up in hospital after struggling to manage without the care they need.

Would probably increase numbers of elderly people needing state support: The proposals would increase incentives for people to give their assets away earlier. Many may decide not to bother paying off their mortgages, or sell their home and give money to their children, or move into rented accommodation or take out more debt in later life. With £100,000 being all they can leave, perhaps to three children, the proposed system would have powerful incentives to spend or give money away early on in retirement, and then get state-funded care.

Savings incentives for Care ISAs or using pensions to help fund care are also vital: Just changing the means-test threshold or introducing a cap on total care costs such as proposed by Dilnot was only ever part of the solution to the care crisis. Today’s baby-boomers are already retiring and many of them do have ISAs and even pension funds, which they may not need to cover all their living costs in their 60s and 70s. Therefore, there is time to introduce incentives for older people to build up or use existing assets to pay for care.  Currently, there are no such incentives and nobody has savings earmarked for this. Encouraging people to save up to a maximum care cap, say £72,000 per person in a Care ISA that can be passed on free of inheritance tax, or withdraw up to £72,000 tax-free from their pension to pay for care, could help people protect themselves, without fearing they will lose almost everything if they get an illness such as dementia.

Proposals do not address the artificial distinction between social care and health care:  The social care system needs a radical overhaul as the public will increasingly reject the unfairness for dementia sufferers. A 90 year-old millionaire with cancer could have all their care paid for by taxpayers but if they get dementia they must pay for themselves. The Manifesto proposals worsened the unfairness, rather than addressing it. A solution to the care crisis will require rethinking the artificial differentiation between elderly health and care needs.

Those unlucky enough to need elderly care will still suffer double disadvantage – must pay for their own care and cross subsidise council underpayments for others: The Manifesto proposals did not address the stark unfairness that people who are unlucky enough to need care which doesn’t qualify for NHS funding, are hit by a double whammy.  They currently pay not only for their own care but also pay towards council-funded patients too as their care home recoups the underpayments by local authorities. Without more funding, councils will continue to pay too little and without sharing the burden across more than just those who need care, the social inequity will worsen.

People may not even be able to keep their last £100,000 as the floor may not be a proper floor:  The means-test threshold of £100,000 may not even be the floor because of the way the care system works.  Local authorities only fund what they consider to be the appropriate care cost for their area. Someone in a more expensive care home (perhaps because it is nearer to their family) or who wants more than 15-minute visits, will have to cover the extra costs themselves even when they are down to their last £100,000. Unless they move to a cheaper care home (which can be very distressing for frail elderly people) or accept less homecare they would eat into the remaining £100,000.

Social care is a life events which seems an obvious candidate for national insurance:  National insurance only covers what is classed as health care, but not social care needs. Surely, social care for elderly people would automatically have been included in Beveridge’s welfare state, had the reality of today’s elderly population been evident at the time.  A basic level of minimum care (like we have with a basic state pension or NHS) which people can then pay more to top up on their own, would be a fairer and more sustainable way forward. A sustainable longer-term solution could see everyone having to pay something into the system. If they don’t need care they are lucky, but if they do need it, then some money will be provided. Forcing old people to pay until almost all their accumulated assets are used up will mean more elderly people having no assets, ending up in poverty and falling back on state support. A recipe for failure.

Conclusion:

The Tory Manifesto proposals for social care would be a disaster and are never likely to be implemented. The Labour and LibDem Manifestos talked of a National Care Service and increasing taxes. However, rather than using care as a political football, a national solution is needed. This could consider extra National Insurance payments, or a charge on all people’s estates, plus new savings incentives alongside pensions and ISAs, and integration of health and social care systems. The care crisis cannot be left any longer, the need for radical action is urgent and a combination of reforms is needed. The sooner politicians wake up to this and work together to find solutions, the better.

June 11, 2017   2 Comments

Election Manifesto for older voters – 6-point plan for reform

20 April 2017

Help poorer pensioners, older women and families facing elderly care

  1. Radical overhaul of social care to ensure fairer system for all – a crisis worse than pensions
  2. State Pension triple lock could move to a double lock, increasing by prices or earnings
  3. Double lock should apply to Pension Credit so poorest pensioners are protected properly
  4. Improve pension outcomes for women – private pensions, State Pensions and WASPI
  5. Reform pensions tax relief to give everyone a 33% Government bonus on their contributions
  6. Encourage longer working life – mid/later-life training, career reviews, apprenticeships

Government plans for Brexit and the economy will dominate many people’s thinking, but a coming Election Manifesto needs to cover other important issues that will affect the lives of older voters significantly.  Here’s some initial thoughts – a six-point plan to improve older people’s lives, while giving a more affordable, sustainable and fairer system for the future.

Here are my suggestions:

  1. Radical overhaul of social care to ensure fairer system for all

In terms of fairness, it is absolutely vital that the Government finally addresses the ongoing and worsening crisis in social care.  The current system penalises elderly people and their families and lowers care standards, while raising the costs to those paying privately.  It is undermining the NHS and places the biggest burdens on those who fall ill, rather than being shared fairly.  There is no help for the poorest people with moderate needs, which makes it more likely that they end up in hospital or care homes and lose their independence.

Meanwhile, older people who do have savings have to lose everything, including the value of their home, before they get any state help at all.  The draconian means-test coupled with council cutbacks, on top of rapidly rising numbers of elderly people in our aging population has caused huge strain on the social care and health services, undermining the quality of social care (such as only allowing 15 minute visits and low paid staff on zero hours contracts).  The system is riddled with unfairnesses and is simply not fit for the 21st Century.  Private payers who are denied state help end up paying over the odds for care, to make up for local authority underpayment.  This penalises those families who are unlucky enough to need elderly care twice – firstly they get no help from the State and secondly they also have to pay extra to cover the costs of those who are covered by the State.

This amounts to a most inequitable stealth tax, hitting the most vulnerable in society.  To add further to the unfairness, elderly people who are judged to have a health need, rather than social care need, will have all their care costs met by taxpayers.  This arbitrary allocation of resources is unsustainable and is placing the NHS under intolerable strain, even before the huge bulge of baby boomers reaches advanced old age.  Proper integration of health and social care is long overdue.  It is obvious that the State cannot pay to look after all baby boomers who will need it in coming years.

There is no money set aside for this purpose and younger taxpayers will be unable to afford it.  Therefore, incentivising those older people who have pensions, ISAs or other savings to earmark a sum to pay for care, while the State then covers the extra on top of that, would kick-start funding which is currently non-existent.  Introducing a Dilnot-style cap on care costs, then allowing tax free withdrawals from pension funds if needed to pay for care, plus introducing a special Care ISA allowance (that can be passed on free of Inheritance Tax) or allocating some proportion of property value up to a limit of, say, £70,000 per person, would ensure baby-boomers have incentives to prepare for their coming care costs, while also signalling that everyone will need to think about providing for care in old age, as well as pensions.

  1. State Pension Triple lock could move to a double lock, increasing by prices or earnings

The triple lock commits to increasing (only some parts of the) State Pension by the highest of price inflation, average earnings or 2.5%.  The 2.5% commitment contained in the triple lock adds billions to the cost (it is estimated that State Pension has cost £3billion more for the years 2010 – 2016 than if a double lock had been in place).

The longer the triple lock lasts, the greater the future cost will be, with official forecasts predicting it will add at least £15billion to the long-term cost of State Pension provision.  The arbitrary 2.5% figure is a political construct with no economic or social logic.  When it was introduced, the State Pension had fallen well behind average earnings, so it served a useful function in increasing basic State Pensions to a more reasonable level.  But pensions have increased significantly relative to other benefits.

The Pensions Commission recommended only increasing State Pensions in line with earnings, but perhaps the Government should offer pensioners the higher of prices or earnings inflation, as a double lock, to protect against rises in the cost of living and average living standards of those in work.  If other benefits are being frozen, or only protected by either prices or earnings, to add the extra 2.5% protection for pensioners will cause increasing resentment and also adds to pressure to increase the State Pension age faster, which disadvantages those with lower life expectancy and in poorer health.  In addition to this, the new State Pension system has rendered the triple lock concept socially inequitable.

  1. Double lock should apply to Pension Credit so poorest pensioners are protected properly

The triple lock, in fact, contains inherent unfairness which will worsen in coming years as more younger pensioners receive the new State Pension.  The triple lock does not actually protect many of the poorest and oldest pensioners because does not cover all State Pension payments.

It only applies to two bits of State Pension – the old Basic State Pension (up to around £120 a week) and the full new State Pension (up to around £160 a week, but only available to the youngest pensioners).  Most importantly, it does not apply to the Pension Credit (which the poorest pensioners receive).  A much fairer system would see the double lock protection extended to Pension Credit to help the oldest and poorest pensioners.

  1. Improve pension outcomes for women – private pensions, State Pensions and WASPI

Women lose out in pensions in many different ways and, although the Government has made some improvements, both State and private pensions policies still discriminate against women.  As regards private pensions, women are losing out in workplace pensions.  There are several reasons for this.

The gender pay gap means they earn less than men, so their pension contributions will be lower but recent studies also show that women work in jobs with lower employer contributions and on average their employers pay 1% of salary less into their pensions than for the typical male.  Women also take career breaks which reduce their lifetime earnings.  In addition to these factors, women are also losing out in auto-enrolment as they are more likely to be low earners.

Only people earning over £10,000 a year in any one job are auto-enrolled by their employer.  So these lower earners lose out on their employer’s contribution and on the behavioural benefits of being automatically enrolled, even though they are the people who would probably most need better pensions and the behavioural nudge of being automatically enrolled.  Many women work in multiple low paid jobs, in order to fit their work commitments around caring responsibilities.  Even if these women’s total income is above £10,000, if they earn less than this in each job, they lose out on auto-enrolment completely.

The Government estimates that over 70,000 women are affected.  These women are also more likely to be losing out in State Pensions too.  The cracks in the National Insurance system penalise far more women than men.  Those earning less than £5,876 a year in any one job get no credit for their State Pension, even if they have multiple low paid jobs that would bring their earnings over the National Insurance threshold.  The Government estimates 20,000 -30,000 women are affected and they get no credit for their State Pension.

In addition, women who have children but are in households with incomes that disqualify them from Child Benefit have to claim the benefit even if they know they’re not entitled to it, otherwise they lose out on their State Pension credit too.  All these wrinkles in the National Insurance State Pension system should be removed, so that women are no longer discriminated against in these ways.  Finally, there are many WASPI women who were not properly notified of changes to their State Pension Age.  The Government should recognise the hardship its failure to communicate properly has caused and should ensure those affected are able to receive some early payment, to compensate for the short-notice increase in pension age which they did not have time to prepare for.

  1. Reform pensions tax relief to give everyone a 33% Government bonus on contributions

The Government decided not to reform the current system of pensions incentives, that revolves around tax relief.  The present arrangements are not understood by the majority of people, who don’t realise that 20% tax relief gives them a 25% Government bonus on their pension contributions, while higher rate taxpayers get 40% tax relief, which is a 66% bonus on their contributions.

Instead of confusing people with a Lifetime ISA that could also be used for house purchase, the Government should introduce a fairer system of pension incentives shared more fairly, with a 33% Government bonus being offered to everyone.  The annual contribution limit would need to be cut from the current £40,000, and the Lifetime Allowance should be reformed or abolished.  The freedom and choice reforms have made pensions the most attractive retirement saving option, but if the Government is serious about helping those in the middle or less-advantaged positions in society, then making the pension system fairer for all should be a priority.

  1. Encourage longer working life – mid/later-life training, career reviews, apprenticeships

If the Government is serious about controlling immigration, given the aging workforce it will also need to ensure that more older people stay engaged in the labour market than ever before.  This will need a radical rethink of workplace practice, as well as greater encouragement of mid-life training, career reviews and apprenticeships.

Those who can and want to work flexibly as they get older should be supported positively, with employers required to ensure age is no barrier to ongoing training and re-skilling opportunities.  Businesses should take the value of older members of their workforce more seriously and unlock the potential of older workers.  This can boost the economy both now and in future, as people have higher lifetime incomes and opportunities to build up better pensions.

April 20, 2017   11 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

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