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Category — Pensions

One pension provider looking after low earners

13 September 2017

  • Government failing to recognise problem of low earners losing out in auto-enrolment
  • Companies using Net Pay schemes are not treating low earners fairly
  • Many low paid women are being forced to pay 25% more than they should for their pension
  • One pension provider is taking the moral high ground – Now:Pensions is paying these workers their tax relief

I am delighted to see that Now:Pensions has confirmed it will give its low-paid customers the tax relief that is denied to them by current Treasury rules. The company is going to pay the tax relief that these low earners should be entitled to, but which the Government is denying them.

Any worker earning under £11,000 last year was entitled to 20% tax relief (which amounts to a 25% Government bonus) on their pension contributions.  If their pension scheme operates on a Relief at Source basis they will have received the money. But if the pension provider chosen by their employer is administered on a Net Pay basis, then these low earners, mostly women, cannot get the 25% top-up. So many women and other low earners are forced to pay 25% more for their pension than they should.

This scandal has been going on for a long time, but the Government has failed to address it.

It is good to see one company taking the moral high ground.  Now:Pensions is a NetPay scheme, but it has chosen to give the extra money to its low earning customers from its own pocket. None of the other Net Pay schemes has been willing to ensure low earners do not lose out.

Ideally, the Treasury needs to allow low earners to claim the tax relief they are entitled to. As auto-enrolment pension contributions are set to quadruple by 2019, the amount of money these low earners lose out on will increase sharply and more women will be denied the Government help they should have. This scandal needs to be urgently addressed and I hope the Treasury will take the matter more seriously as most of these low earners will be women, who are far more at risk of inadequate pensions than men.

In the meantime it is good to see at least one company making a stand to improve women’s pensions and treat low earners fairly.

September 13, 2017   No Comments

Finally, a ban on pensions cold calling

20 August 2017


  • Great to see DWP will act, not just keep consulting
  • Protecting people’s pensions from fraudsters is so important
  • Can give clear message to the public that anyone who contacts them out of the blue about their pensions is a criminal
  • This issue has clear cross-party and industry support

Banning cold calls and tightening protection against transfers to fraud schemes: The Government has bowed to the overwhelming pressure from politicians in all parties, consumer groups and the pensions industry to urgently introduce a ban on pensions cold calling. This is great news. It is also going to toughen rules on transfers out of occupational schemes and tighten HMRC requirements that will make it much more difficult to set up fraudulent schemes.

The case for banning unsolicited approaches seems clear and unequivocal: Currently, any scam company can buy a list of ‘prospects’ and contact them out of the blue to offer them a free pension review that leads to them losing their entire pension in a fraudulent scheme. Cold calling for mortgages was banned years ago and the public needs the same protection for other financial matters. People can only be approached about a mortgage if they have expressly requested contact from the company by name. Just ticking a generic box about financial promotions would not make the approach legal. Doing the same for pensions would be a significant step forward in protecting the public

Banning unsolicited approaches means we can send clear message to the public – JUST HANG UP! No reputable company should need to contact people out of the blue – they can find better ways to generate business. A ban would send a strong signal to the public that if someone contacts them out of the blue to discuss their pension, they should ‘Just Hang Up’. If they receive unsolicited texts or emails, ‘just delete them’. Anyone who does this will be a criminal. Even that friendly person offering a free review will not have your interests at heart. A ban would make the situation clear.

Public needs to be better protected: Since 2014, people have been scammed out of £43million of pensions and just in the first five months of this year they have lost £5million to fraudsters. This is money people need for their retirement and the scams nearly always start with a cold call. Government initiatives so far have not worked. Measures to impose Caller Line Identification and campaigns such as ‘Scorpion’ and ‘Project Bloom’ are not protecting people enough. ‘Action Fraud’ figures show over 2000 frauds reported since 2014, but only 7 suspects have been summonsed or charged and no convictions.

Pension freedoms give people more flexibility but also mean they need better protection: The new pension rules ensure people can use their pensions more freely, but this also increases the risks they face and leaves more people in need of guidance. It is right to give people more flexibility and choice over their pension savings, but the Government is right to ensure that it also increases protection against fraudulent unsolicited approaches.

Government will also tighten rules to stop set up or transfer to fraud schemes: It is also welcome news that the Government intends to tighten HMRC rules that will make it harder to establish fraudulent schemes and also toughen rules on transferring pensions from one scheme to another. Only companies who produce regular accounts will be approved as pension schemes and trustees of occupational pensions will be required to check that receiving schemes are regulated by the FCA, or are authorised as MasterTrusts or have a clear employment link.

Public should always check with PensionWise: Some scammers have masqueraded as a ‘Government approved’ review service. Individuals may have heard that the Government has indeed set up a free guidance service, called PensionWise, but it is vital to let people know that PensionWise will NEVER cold call you or contact you without you approaching them first. So the clear message to the public is that you should always contact PensionWise or your independent financial adviser before reviewing or making decisions about your pension.

The sooner the Government acts, the sooner we can improve protection for people’s pensions: We will never stop such fraudsters completely, but these measures will certainly protect the public better – about time too.

August 20, 2017   No Comments

Women’s state pension age rises – IFS research

2 August 2017

  • Controlling State Pension costs is right but 1 in 5 women affected pushed into poverty
  • IFS research shows rising State Pension age saves billions but leaves many in hardship
  • Working age benefits are not enough to support women unable to keep working
  • Government failure to properly inform women could justify helping some bridge the gap

Government is right to look to control the costs of state pensions: Clearly, in an aging population, with rising longevity and pay-as-you-go pensions, younger generations need to be protected against excessive burdens of old-age support. Equalising men and women’s pension ages makes sense, especially as women tend to live longer than men.

Failure to adequately warn women about rise from age 60: Ideally, though, any policy changes would be communicated well in advance and those affected would be given sufficient time to prepare for delays in starting pension receipt. Unfortunately, as the WASPI campaign highlights, the failure to communicate clearly and effectively is causing real problems for many of the women affected by the sharp pension age increases which started in 2010.

IFS shows significant cost savings: Research released today show the scale of the impact of rising State Pension age on those older people affected and on the public finances. The rise in women’s State Pension age between 2010 and 2016 has saved over £5billion in public spending and has benefited the Government in three ways. Firstly, the money saved by not paying pensioner benefits. Secondly, higher tax and national insurance receipts as women have continued working while waiting for their State Pension. Thirdly, the additional work these older women are doing should have boosted the economy.

But delayed pensions also caused increased poverty: Many of the women waiting longer for their state pension have been pushed into poverty. The IFS suggests one in five women aged 60-62 were in income poverty when their state pension age was increased to 63. It is clear from this new research that as long as women can keep working, they can mitigate the impact of delayed State Pension receipt, but those who cannot work either through illness, caring duties, unemployment or workplace age discrimination are left struggling.

Men are also affected by this change: Up to 2010, older men who were unable to work and had little other income could claim pension credit but the starting age for receipt of means-tested Pension Credit is also tied to women’s state pension age. So, as women’s state pension age rose to 63, men also had to wait longer for extra help. The IFS suggests that many single men have also been forced into income poverty as a result of this delay.

As State Pension age keeps rising, no allowance is made for those who cannot work:  There is a stark cliff-edge between the benefits available to people below state pension age and those above it. This is designed to encourage more people to keep working, however it makes no allowances for the problems of the significant minority of older people who genuinely cannot work. By 2020, the age for men and women will rise to 66 so the numbers in poverty will grow.

The poverty is temporary, but there’s no help to bridge the gap: The IFS points out that this poverty is temporary and as soon as they reach the new higher State Pension starting age, people will be better off. However there is nothing in the system to help those who really need to bridge the gap. If they have no private pension or other savings (and many older women have been particularly disadvantaged throughout their lives by lower earnings and lack of pension rights) then they have no choice but to cut back their spending to minimal levels. The IFS suggests they are not facing ‘material deprivation’ but politically there is a large group of older people who feel they have been unfairly treated and were not given sufficient chance to prepare themselves. Those affected might have been able to cut their spending in earlier years if they had been aware of the coming increase in their pension age. By failing to properly inform them, the hardship caused has been exacerbated.

Government could consider measures to ease the hardship of transition: There are no easy answers here, and it is important to control state spending, but I do hope Government might consider devising interim measures to help women – and men – in the transition period between their previous State Pension age and the new later date. Perhaps with early but reduced access to State Pensions, or payments that recognise poor health and other impediments to working longer, targeted on those in hardship due to the delayed pension age. It cannot be beyond the wit of policymakers to recognise the problems caused by the sharp rise in pension ages over a relatively short period of time and, in light of the cost savings, perhaps some help could be offered.

August 2, 2017   9 Comments

State Pension Age and Social Care

21 July 2017

  • Government needs to rethink the retirement contract for older people
  • Just relying on the triple lock and rising State Pension age is not sustainable
  • National Insurance needs to help those with lower life expectancy or needing social care

The Government has just announced that the UK State Pension age will increase faster than previously expected. By 2039, nobody will be able to start their state pension before the age of 68. This affects people born between 1970 and 1978 who would be eligible to receive their state pension at age 67 under the current planned timetable.

This rise was recommended by John Cridland’s recent official review of State Pension age and is based on forecasts of average longevity. As ‘average’ life expectancy is rising, and the Government needs to control State Pension costs, the state pension age keeps rising. This will save around £75billion to future taxpayers.

However, it does not take any account of the significant differences in life expectancy across the country, between social classes and also between occupations. The current national insurance system makes no allowance for people who will not live long enough to reach state pension age, or who will die soon afterwards.

National insurance amounts to over 25% of salary for most people, yet some will get little or no pension even if they have contributed for the full 35 years. Of course, as life expectancy and health improve, most people should be able to wait longer for their state pension. But what about those who cannot?

I would like to see more flexibility in state pension age: perhaps with a flexible band of ages at which the pension could start, or perhaps allowing people to take their state pension at a lower age, either because they are seriously ill or because they have worked for more than 50 years.

People might be allowed to start their pension between the ages of 65 and 70 – perhaps even with the rate they receive being adjusted for early access. This would be much fairer to more disadvantaged people, allowing them a choice they are currently denied. There might also be earlier receipt for people who have, say, 50 years worth of National Insurance contributions. For example, if they had left school at 16 and contributed for 50 years, perhaps they could get their pension at age 66.

At the moment, the state pension is flexible only for those who are healthy and wealthy enough not to need to take it at state pension age. If they can afford to wait longer, they can get a higher state pension; but if they cannot manage until that age, it is just too bad. They cannot get a lower pension, they will get not a penny earlier. Is this the best we can do?

It is true, as John Cridland says, that there would be some difficulties in this approach, but just because a policy is challenging does not mean it is wrong. The central issue here is whether the state pension should be run on a one-size-fits-all approach, based purely on estimates of the “average”, or whether it should have some flexibility to account for people’s increasingly flexible lives.

Yes, it is great news that more people are living longer. And most people can work longer – but surely we can find ways to include those who are unable to do so, and who have much lower-than-average lifespans.

I would like to stress, though, that I do not agree that the state pension age should never rise above age 66, as proposed by the Labour party. And the cost of allowing everyone to get a full pension at 66 for decades to come would be too much of a burden on younger generations in our pay-as-you-go national insurance system.

Clearly, many people will want to work longer, and can wait for their state pension. However, it would be fairer to allow some to choose to take a pension sooner, if they really need to.

We need to move away from the idea of just one “magic” age at which people should aim to stop working and live on a state pension. A band of ages would take us from this one-age notion and would accommodate the reality of 21st-century retirement, which is that people will increasingly move from full-time work, to part-time work, before stopping altogether.

The more we can encourage this kind of “pretirement” phase, the better it will be for our ageing population. Individuals who can work flexibly in later life can achieve higher lifetime incomes, can boost overall economic activity, and could have more money to spend in their advanced older age.

Finally, the current state pension system offers no help for social care. If William Beveridge was designing our national insurance arrangements now, he would surely make provision for care needs in advanced old age, rather than assuming that the only income for retirement the state needs to pay is a state pension.

Incorporating social care into national insurance would offer an opportunity for the government to rethink state pension age and overall retirement provision, and take account of individual needs. Leaving out those who have been hard manual labourers for all their working lives, or who have a much shorter life expectancy, may need to change.

Future reviews of social care and state pension age would provide a chance to reconsider these issues. A fairer level of social support in retirement would be a major improvement on the current situation. Just promising a ‘triple lock’ on parts of the state pension is not enough for pensioners. It’s time to think again on how we help older people.

July 21, 2017   No Comments

Who will help sort out this auto-enrolment pension scandal?

21 July 2017

  • Who will help sort out this auto-enrolment pension scandal?
  • Low earners losing money but don’t know it yet

I want to highlight a major pensions injustice concerning employers who choose an auto-enrolment scheme administered on a net pay basis.

Such schemes cannot add the 25 per cent bonus of tax relief to contributions of workers earning less than £11,500 a year from the employer.

Auto-enrolling these employees – mostly women – into a net pay scheme forces them to pay extra for their pension. Every £10 that someone on more than £11,510 a year puts into a pension will cost only £8 but every £10 low earners contribute costs them the full amount. So the lowest paid are paying £2 more for the same pension.

If their employer were to use a relief at source scheme instead, no one would have to pay more than £8 for their £10 of pension. But most employers would not understand the difference between choosing a net pay or relief at source scheme.

When discovering this as Pensions Minister, I tried desperately to address it but nobody was interested in helping the low earners. Officials said “It’s not much money”, which I found unacceptable.

Firstly, it may not be much money, but it could and should be theirs if their employer had chosen a different scheme.

Secondly, auto-enrolment contributions will quadruple and personal tax thresholds will rise, so the numbers of low earners and the amounts of money they are losing will just keep growing. When I was Pensions Minister I was astonished to find that even though I asked The Pensions Regulator to alert employers to the issue, they refused to listen. The first reason they have was that it is not illegal to deny low earners this money, so the Regulator could not get involved. I was so disappointed at this.

I then highlighted that the Regulator’s own template letters and website, designed to help employers choose a scheme and explain auto-enrolment, misleadingly said workers would receive employer contributions and tax relief under auto-enrolment when this was not necessarily true  if they were low earners in a Net Pay scheme. After many months I eventually persuaded it to change this but the wording was weak and fails to explain the issue clearly.

I met the people running the MasterTrust Assurance Framework, asking them to assess whether net pay schemes were being honest with employers and members about this issue as part of its seal of approval. But they too did not consider it an important issue.

I asked Treasury ministers to help. They initially replied that tax relief was being consulted on. Then I asked them to amend the rules or at least allow net pay schemes to reclaim the extra relief for their low earning members but was turned down every time. I did have one real success. Now:Pensions MasterTrust, which operates only on a net pay basis (Nest uses relief at source and The People’s Pension offers both) offered to pay the extra 25 per cent bonus to all low earners from its own resources. This was not widely publicised but it deserves high praise.

Since leaving Government, I have asked a series of Written Parliamentary Questions on this issue which have been replied to with non-answers. Ministers just continually ignore my requests to solve the problem, claim they do not know how many people it affects and that it is up to the Regulator to help and inform employers about how to choose a good pension scheme. Clearly, the current situation is unacceptable. All I can do is keep flagging it.

If or when these workers discover they have been charged more for their pensions than they should have been, what will they do? They had no control over the choice of scheme; it was arranged by their employer, who may have used an adviser or relied on regulator and Government guidelines. It is not clear the workers have any protection under the law, this hasn’t been challenged yet. But if the situation remains unresolved, I do believe this could turn into another scandal – which is the last thing pensions need. The injustice is only going to get worse. The sooner this issue is properly sorted, the better, and I would welcome help from you in pressuring for change.

July 21, 2017   No Comments

Pension Schemes forced to stop discriminating against same-sex partners

12 July 2017

  • UK pension funds cannot discriminate against same sex partners
  • Landmark ruling rightly requires pension schemes to treat all partners equally
  • Costs could run to hundreds of millions of pounds

The Supreme Court has ruled that same-sex partnerships must be fairly and properly recognised within UK pension schemes. In a landmark ruling, ( INNOSPEC VS. WALKER) the judges ruled that a pension scheme member who is married to a same sex partner must be treated the same as if they had an opposite sex partner. At last, there is clarity that pension schemes cannot discriminate on gender grounds in this way.

What has the Court ruling changed?  Until today, members who were married to someone of the opposite gender would know that their surviving partner will inherit part of their pension. Even if the member married that person long after they left the scheme, the inheritance rules would apply.  However, if the member had a partner of the same gender, even though they may have been together for decades, their pension scheme might refuse to pay a survivor’s pension on the grounds that the law only recognised gender-equal partnerships since 2005.

Will this affect all UK pension schemes? In reality, most pension schemes have already been treating all partnerships the same, but around 20% of private schemes have not yet done so and Mr. Walker, who has lived with his partner for decades, has sued the Innospec pension scheme because it refused to agree that his partner would inherit his survivor pension rights for the entire period in which he belonged to the scheme. Having had to fight all the way up to the Supreme Court, the issue has been settled and all UK pension schemes will now have to pay survivors’ pensions to same-sex partners on the same basis as they would for opposite sex partnerships.

What might this cost? Estimates suggest that the cost to private sector pension schemes could be around £100million and there will also be costs for public sector pension schemes too. Of course we will not know the precise costs because the money only needs to be paid once the member passes away and only if the  member is survived by their partner.

What other implications might there be? There could be further implications of this ruling, in that widow’s pension rights in many schemes differ from the pension rights of widowers.  In some schemes, a husband cannot inherit the wife’s pension, but a wife will inherit that of her deceased husband.  I expect this issue will now be looked at again – and the cost to public sector pension schemes could be hundreds of millions of pounds.

July 12, 2017   No Comments

Pension Freedoms need to work better for customers

12 July 2017

I welcome the FCA Retirement Outcomes Review and its focus on the customer but I am disappointed that the pensions industry has so far failed to radically change its approach.

The pensions industry needs to wake up to the tremendous new opportunities offered by pension freedoms and auto enrolment. This is the time to show real, innovative thinking in the customer interest but sadly the industry has so far failed.

Where are the new products or default options? And why are they called ‘default options’ anyway? The word ‘default’ is hardly attractive to non-pensions people!

Customers may be taking money out of brilliant pensions products without realising the benefits they are giving up – and possibly paying unnecessary tax too.

New thinking might include, for example, a concept of ‘Lifetime Pension Accounts’ which stay invested until you really need some income or capital. ‎These could seamlessly run from a ‘growth phase’ to an ‘income phase’ when the customer wants to, without the huge extra charges involved in drawdown. Taking money out of pensions too early is detrimental to your financial well being.

The Government’s free guidance service could also help customers understand the benefits of staying invested for longer especially if still working. So perhaps we should make PensionWise free guidance mandatory or at least the default option.   Ideally people need advice but at least PensionWise can steer them away from dangerous decisions

This FCA study is another wakeup call‎ for the pensions industry to up its game and look after customers.

July 12, 2017   1 Comment

Pension freedoms mean pension transfers make more sense

21 June 2017

Good news: Regulator wakes up to new landscape for pension transfers

  • Advisers encouraged to recognise that transferring out of a final salary scheme could be the right thing to do
  • Pension freedoms have radically improved attractions of Defined Contribution pensions
  • Vital to understand both risks and benefits, rather than assume transfers always wrong

The new world of pension freedom and choice paves the way for fresh thinking on transferring out of Defined Benefit pension schemes. Here’s a summary.

Strong reasons not to transfer will include:

  • If you are frightened that this decision is irreversible and you might regret it
  • If the DB scheme is your only pension
  • If you value the peace of mind of a guaranteed regular income
  • If you are concerned about inflation and have an inflation-linked DB pension
  • If you do not want to take investment risk
  • If you don’t want to pay someone to manage a pension fund for you
  • If you might exceed the Lifetime Allowance and face a hefty tax charge
  • If you might lose enhanced protection

And there are some strong reasons why DB transfers make sense:

  • If you have several DB pensions, could transfer some and still retain guaranteed income
  • If you’re in poor health and fear dying young
  • If you are single and have no use for spouse pension
  • If you want to pass any unused pension fund on tax-free to anyone you choose free of inheritance tax (and free of all tax if you die before age 75)
  • If you are happy to take some risk and want the chance to benefit from future tax-free investment returns
  • If you are comfortable with managing money or finding someone to do that for you
  • If you want a fund to help pay for care if needed (£20 a week DB pension could be worth £30,000-£40,000
  • In some cases, if you have large debts, the money could help you to pay them off

FCA recognises case against DB transfers has radically changed: The FCA has just launched a consultation which could change the way people wanting to transfer out of a final salary-type (DB) pension schemes are treated. Two years after the pension freedoms were introduced, making Defined Contribution (DC) pension schemes far more user-friendly, the Regulator is rightly recognising that the case against transferring out of guaranteed employer schemes has radically changed. Each case should be considered individually to assess the benefits and risks for that person.

Can be strong reasons to transfer out but must understand risks first: In the new pensions world, there are some compelling arguments in favour of DB transfers but the decision must not be taken lightly, particularly because it is irrevocable. Anyone whose transfer is worth over £30,000 must get independent financial advice.

Advisers have been under regulatory pressure to assume transferring out is wrong: In the old regime, the regulators rightly warned strongly against advising anyone to transfer. Indeed, financial advisers often refused to do the transfer for clients still wanting to after being advised against it. But the pension freedom reforms mean this attitude is outdated.

DC much more attractive now: Defined Contribution pensions, which build up your own individual pot of money for your retirement, are much more user-friendly now.

End of mandatory mass-annuitisation: In the past, someone who wanted to take their tax-free cash from a DC pension would usually have to buy an annuity with the rest, unless it was a very large fund. These annuities were inflexible and might not suit their needs. Now you can take out some money if you want to and leave the rest invested for later life. Some people can even get more tax free cash from a DC scheme than from DB.

No 55% death tax, can pass on IHT-free: People can now pass their pensions on in full to loved ones free of inheritance tax, whereas in the past they would face a 55% death tax charge on their unused fund. A DB scheme will only provide a fraction of the pension income for a partner and perhaps nothing for other relatives.

Those in poor health could benefit from transferring: Someone in poor health, who dies relatively young, will not have had much money from the scheme, but could pass on a fund to their loved ones instead. If they are single, the partner’s pension in their employer DB scheme will have no value to them.

Transfer values have risen enormously as interest rates have plummeted: Low interest rates have increased transfer values, which makes them more attractive. Capital sums worth 30 to 40 times the annual pension could provide good alternative financial security for some. There are those who think the period of low interest rates will end soon and, therefore, feel today’s transfer values are likely to fall in future, so want to take the money now. There is no certainty that rates will rise, but there are other reasons to consider transferring.

Some people have large debts: If you have no other way to pay off debts, it may be worth considering transferring a small pension to help you out. It is vital to get advice, perhaps from PensionWise first though.

Many have several DB pensions – could transfer some and keep others: Many people have a few past pensions from previous employers, often some small deferred pensions of only a few pounds a week. But these could be worth thousands of pounds. A £10 a week DB pension could be worth £15,000 – £20,000. People with a good base of guaranteed pension income from other past schemes could cash-in some while retaining others.

Could use DC transfer to provide money for care: People could also use the funds from a transfer to provide a pot of money for long-term care. A £20 a week pension would not pay for care, but £30,000 – £40,000 in a DC pension could help enormously. This alone is a powerful reason for those with several pensions to consider transferring, as nobody has set money aside to cover care costs. In fact, the Government should think about allowing tax-free DC withdrawals if used for care.

But beware of Lifetime Allowance rules: Given the sharp rise in transfer values, people need to be careful of hitting the lifetime allowance, or losing enhanced protection. DB pensions are treated much more favourably than DC under the illogical Lifetime Limit rules.  The DB lifetime allowance test of 20 times starting pension means a £40,000 DB income is worth well below £1m but could generate a £1.5m transfer value with a hefty tax charge.

Of course, many people will still be best-advised to stay with their employer’s guaranteed pension: Especially if they have no other pension, the certainty of the employer promise (even with the risk of reduction in the PPF) is very valuable. Those who value guaranteed income with inflation and partner protection, and do not want to worry about investment risk, should not transfer. The decision is irrevocable, so it is vital to get good advice first.

FCA recognises that DC pensions are more attractive now: Transferring out will not be right for everyone, but there are now some compelling arguments in favour of DB to DC transfers and the Regulator is recognising this reality with its consultation. That’s welcome news.

June 21, 2017   1 Comment

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.


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

No room for complacency as UK firms struggle with pension costs

15 May 2017

I put in a response to the DWP’s 100+ page Green Paper consultation on the sustainability of final-salary-type pension schemes. My response was also lengthy, but I’ve summarised it for you below, although you can link to the whole thing from there if you want to.

I do feel that urgent attention must be given to consolidating schemes, moving away from the over-reliance on gilts (schemes need to ‘manage’ risk, not ‘minimise’ it) and using these huge sums of money more productively as we head towards Brexit. Almost all private schemes are closed and in five or ten years’ time those employers will have no interest in them, they can’t afford annuities and need a new self-sufficiency regime instead, as has effectively been done for BHS!

This is a really important issue.


Main points:

  1. The Green Paper seems too complacent about the affordability and sustainability of DB pensions. UK DB pensions are the most expensive in the world and most private sector schemes are now closed as the costs have soared beyond any previous expectations.  Potential post-Brexit economic uncertainty makes contingency planning for such huge asset pools even more urgent.
  1. Quantitative Easing has undermined DB schemes. It has inflated estimated liabilities, increased annuity buyout costs and driven excessive investment in lower-return bonds.
  1. UK DB pension schemes are currently misallocating resources, to the detriment of the economy and future generations.
  1. DB scheme advisers are too focussed on minimising risk, rather than ‘managing’ risk. Optimising returns rather than maximising returns is required, allowing for upside to outperform liabilities when schemes are in deficit.  Just focussing on matching liabilities is not enough, schemes need to outperform if they are in deficit with a weak sponsor.
  1. DB pension assets would be better used to invest in growth-enhancing investments, rather than just chasing low-return ‘safer’ fixed income.
  1. The Regulator needs more powers to oversee consolidation or merger of smaller and medium sized schemes, to achieve economies of scale, improved cost-effectiveness and efficiency of investment management and better governance standards.
  1. Pooling assets can help ensure better standards of investment management, access to more diversified asset classes, better quality advice and professional risk management.
  1. Current annuity buyout requirements are too draconian. Using BHS example, the Regulator should devise a new self-sufficiency measure (perhaps technical provisions plus a margin) to allow employers to sever ties without having to meet full annuity buyout costs.
  1. A regime is needed for the future of closed schemes, to ensure the assets and liabilities can be managed effectively over the long-term.
  1. Open schemes are in a very different position from closed schemes. As most private sector schemes are now closed, their sponsors will have no economic interest in their liabilities in a few years’ time, as no staff will be accruing benefits.


Edited highlights of full response to Green Paper consultation:  You can link to the full response here


  • UK Defined Benefit (DB) pension schemes are the most expensive in the world and employers may be hampered by legacy liabilities.
  • Unless the employer is facing imminent bankruptcy, benefits can never be reduced, and even changing the benefits can be difficult.
  • The regulatory regime worked reasonably well for the past 12 years. However, the DB landscape has changed significantly over time.  Most private sector schemes are now closed and if we wind forward 5 or 10 years, the employer currently responsible for scheme funding will probably have no workers in the scheme, so why would they have an interest in supporting it?
  • Quantitative Easing has damaged DB schemes and their sponsors by inflating assessed liability values and the costs of annuity purchase. Government policy must adapt to the new realities.
  • With Brexit on the horizon and such huge uncertainty about the future, planning for a new DB landscape now is the prudent approach.
  • There is no room for complacency, given the medium term outlook for private sector schemes.
  • I disagree with the Green Paper conclusions that employers could afford to fund their schemes more fully, but are choosing not to. It is true that some employers are paying dividends which could cover the costs of their deficit repair relatively easily, but they also have to support their business and other staffing issues.
  • The DB system is currently in an inter-regnum period, leaving the Government and the Regulator with a difficult balancing act to strike at this time. On the one hand, before private schemes close altogether, trustees need to try to get as much money in as possible.  But, on the other hand, if forcing employers to put more in today will just mean the business is weaker or more likely to fail, especially if there is near-term economic post-Brexit dislocation, members’ interests will be jeopardised.
  • The draconian annuity buyout requirements are placing much bigger burdens on employers than they are equipped to cope with. It is also driving excess emphasis on fixed income investments, at the expense of higher-return asset classes.
  • Using corporate assets to buy more gilts for pension schemes, potentially with money that will be needed as a buffer against economic downturns in future, could undermine the sponsor and ultimately the economy.
  • Some employers have already exceeded their capacity to support their scheme and cannot afford to walk away by buying annuities either. They are effectively prisoners of their scheme, thus harming competitiveness.  The current approach is trying to make the best, the enemy of the good.
  • To cope with the future run-off of DB schemes, Government should consider introducing a ‘Winding down regime’ that allows employers to sever ties with the scheme without having to buy annuities.
  • The prevalence of small and medium sized sub-scale schemes is hampering good outcomes, making benefits more expensive to deliver. A new regime is needed that can facilitate scheme mergers.  This will enable economies of scale to deliver more benefits, more reliably.
  • Although not ideal, I also believe the pragmatic approach is to allow schemes the chance to move indexation and revaluation from rpi to cpi. A statutory over-ride would recognise the unaffordability of some schemes for their sponsors and is the minimum adjustment that could help some schemes to manage their costs more sustainably.
  • Scheme mergers are going to be essential in the coming years. This will not only cut costs, but will also allow better governance and access to a wider range of investment opportunities.
  • Currently, there seems too much emphasis on ‘de-risking’ by means of switching to fixed income. This is, in my view, potentially damaging.
  • In light of exceptionally low bond yields, artificially distorted by central banks, the traditional risk models may be misleading. It is not clear that Government bonds offer ‘risk-free returns’ and in some cases they may be offering ‘return-free risks’.
  • Some schemes have lost out significantly by chasing gilts, rather than relying on supposedly higher risk assets.
  • Asset allocation now emphasises minimising risk, rather than maximising returns. This could be reckless conservatism and trustees need to manage investment risk, not just minimise it.  Given the uncertainty surrounding investment risk measures and the need to outperform (not just match) liabilities, switching to lower return holdings could increase the risk of failure.
  • Many smaller schemes do not have access to the most modern methods of money management and also fail to get the benefit of top advisers. Many do not have professional trustees or investment expertise on their board.  They would benefit from broader diversification and access to better investment approaches.
  • As we look forward over the next period, with most schemes closed, investment performance could be a key determinant of DB sustainability. Current sub-scale schemes are not likely to have the resources or expertise to make the most of the investment opportunities open to larger schemes.
  • The Regulator (and/or the PPF) may need new powers to negotiate terms on which schemes can ‘walk away’ from their liabilities, without full annuitisation. A new self-sufficiency regime would also require the Regulator to have increased powers to demand information from schemes, with penalties payable for non-compliance.
  • The Regulator should also have powers to facilitate scheme mergers on a more cost-effective basis, allowing trustees to judge what is in the best interests of members and, if they have made every reasonable effort to contact members, to allow them to ultimately consolidate or change the scheme without every single member’s consent.
  • Forcing sponsors to support unaffordable liabilities or go bust is a damaging binary choice. Using BHS as an example, it should be possible to devise a system whereby employers can pay a defined amount into their pension scheme, or commit to a programme of ongoing payments for, say, 5 years, that will end their responsibility.  This could be on the basis of technical provisions, plus a reasonable margin to allow for uncertainty.
  • The Regulator or PPF could introduce a range of consolidator funds to help manage long-term liabilities. These could invest assets in housing and infrastructure, as well as start-up businesses to provide an improved source of funding for the UK economy.
  • Small employers and charities urgently need relief from the draconian legal burdens that were originally designed in a different environment. For example, forcing plumbers to lose their homes and their entire life savings, just because they tried to provide pensions for a few of their staff, is disproportionately harsh.  Perhaps allowing them an RAA route can be considered.
  • Currently, there is little differentiation between requirements placed on open and closed schemes. An open scheme has very different characteristics, with much longer time horizons and greater ability to increase member contributions to cover rising costs over time.  It is closed schemes which need closest attention and consolidation.
  • I believe the Regulator should relax its attitude to DB to DC transfers. Many members, especially with small deferred entitlements, could benefit from transferring out, and the transfer value should, in my view, reflect any underfunding in the scheme. The assumption that it is almost never right for members to transfer is outdated, given the DC pension freedom changes.

May 15, 2017   1 Comment