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 21^st 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

5 April 2017

• Launch of Lifetime ISAs – don’t be fooled
• Hardly any providers offering LISAs – probably due to complexity and mis-selling risks
• Mixing house purchase and pensions will damage ISA brand
• LISAs may be good for first time buyers, but dreadful for retirement – saving for house deposit very different from long term investment for retirement
• Trying to turn pensions into ISAs undermines young people’s pension prospects
• Why not just improve the Help To Buy ISA and leave pensions alone?!

The new Lifetime ISA launches tomorrow. Thankfully, most providers have steered clear of it, they can see the dangers. Don’t be misled. If you want to buy a first home and are saving for a deposit, then the 25% Government bonus is a great deal. But using this as a pension has significant dangers you may not be aware of. Most providers are shunning Lifetime ISAs due to fears of mis-selling. They are right. This is a complex product which could leave millions of young people poorer in retirement. It has mis-buying and mis-selling risks written all over it! There is already much confusion and the Pensions and Lifetime Savings Association (PLSA) suggests many young people are considering opting out of their workplace pension to save in a LISA instead. That could undermine their future prosperity, so it is important to clarify some of the biggest issues.

1. LISA gives you much less than workplace pensions: The 25% Government bonus is exactly the same as 20% pensions tax relief so you will not get any more money in a Lifetime ISA than you would in a pension. However, you will lose out on other money if you opt out of pensions and choose LISAs instead and you need to understand this before you decide.
2. Pensions give you much more than just a 25% bonus: Workplace pensions can give you extra money from employer contributions, higher rate tax relief and National Insurance relief. This could be more than 100% bonus on your money, so pensions will usually give you far more than the Lifetime ISA on day one. It’s just that this is not properly explained when you get your pension statement, so most people don’t realise it.
3. The 25% withdrawal charge is NOT just clawing back the 25% bonus. Many people do not realise how the LISA works and will believe they just lose the Government bonus. It’s much more than that.
4. The LISA charges more than 6% penalty if you want your money back: If you put £4000 into a LISA and get the £1000 Government bonus but then want to take your money out again, the 25% withdrawal charge will be £1250 (and you will have to also pay charges for your LISA account too of course). That means you will get less than £3750. You will be charged more than £250 just to get your own money back – a large extra penalty.
5. Mis-selling and mis-buying risks are clear – customers need advice: LISA providers may not clearly explain the risks of the large withdrawal penalties, and how much money young people will lose if they opt out of employer pensions. The FCA is trying to ensure risk warnings are given, but in reality the provider should check that customers have not opted out of workplace pensions, or have taken financial advice, so they have made efforts to check if a LISA is suitable for them.
6. Saving for a house deposit in cash is fine, but cash is not suitable when investing for retirement over several decades: It is dangerous and misguided to conflate saving for a deposit on a first home, with investing over several decades for retirement. House purchase saving can be in cash, but long-term investing should be in growth assets and a broader spread of risks, including overseas investment, which would not really be suitable for a house deposit, but which can give better returns over time. Most ISAs are held in cash and, if pensions are turned into ISAs that are just put into cash accounts, young people are likely to be much poorer in later life.
7. Serious risk of undermining the success of auto-enrolment: Pension coverage has spread to millions of new workers as employers have to put all staff earning above £10,000 a year into a pension scheme at work. But worrying PLSA research suggests many young people may opt out of their workplace pension, without realising how much they’d lose by doing so. Just as auto-enrolment is proving a success, along comes a new product to confuse things. It is not true that people don’t like pensions, auto-enrolment opt-out rates are really low, especially among the young. I am pleased that so few providers are offering this product because most young people will be better off in retirement if they use a pension.
8. Behavioural nudges of Lifetime ISA are not suitable for retirement saving: The Lifetime ISA has behavioural features that make it far less suitable for retirement saving than a pension. Pensions are designed to fit with the principles of behavioural economics, while ISAs have perverse incentives.
9. Pensions ensure more money goes in on day one. Auto-enrolment takes advantage of inertia as well as ensuring employers have to contribute too, so people have more money to begin with in pensions than in LISAs.
10. Pensions are locked in until later life, while LISA does allow withdrawals. However, withdrawals face the stiff penalty of over 6%, leaving people with much less in their fund along the way.
11. Pensions are taxable on withdrawals beyond the 25% tax-free lump sum in later life. This deters people from spending the money too soon, which is the right behavioural incentive. The incentive with a LISA will be to take all the money out around age 60, and have nothing left for your 80s – in other words, the features of the Lifetime ISA mean it is designed NOT to last a Lifetime.
12. Pensions could even help pay for later life care. Pensions encourage people not to spend their money too quickly and, because they pass on free of inheritance tax, there is no need to worry about keeping it till much later life – so it could even help fund care needs if necessary. Young people will have much poorer retirement prospects with LISAs than pensions.
13. Lifetime ISAs are great for the wealthy but will cost taxpayers an extra £1billion – is that money well spent? At a time when bereavement and child benefits are being cut, the LISA is going to cost an extra £1billion to the Treasury in the next few years. Two groups of people will most benefit from using a LISA for retirement saving. Firstly, wealthy under-40s who have already filled their pension allowances (perhaps they already have £1million of pensions or have contributed up to the £40,000 maximum into pensions). Secondly, non-earning relatives of wealthy people who have already put the maximum £3600 into a pension for them to get the tax relief and will now get a further taxpayer top-up for an extra £4000 for them. Is this a sensible use of taxpayer resources?

CONCLUSION: Lifetime ISAs should be abandoned. Stop confusing young people between retirement investment and saving for a house deposit – just reform the Help To Buy ISA and build on the success of auto-enrolment for pensions. The product is too complicated, will confuse customers and the last thing we need is another mis-selling scandal.

5 April 2017

Last night I attended an interesting event run by the Financial Times.  A large group of people came along to learn more about transferring out of Defined Benefit pension schemes.

It was an interesting session.  I thought it might be helpful to outline my views on this issue, as the conventional thinking is not necessarily fully reflective of new realities.  This is not meant to be giving anybody financial advice, this is about highlighting the important issues that need to be considered, understanding the questions you need to ask and the value of getting financial advice.  Whether or not to transfer out of a final salary-type scheme will depend on a complex array of factors that will be personal to each individual.  There are some rules of thumb that can be given, but even then it will be best to try to find a financial adviser to help you make sure you’ve considered all the vital issues.  I am trying to give a more balanced view here.

There are no absolutely right or wrong answers, but I certainly believe that the current regulatory attitude is out of date.  The FCA and the Pensions Regulator both insist that it will almost always be wrong to transfer out.   FCA guidance states ‘in most cases you are likely to be worse off if you transfer out of a defined benefit scheme, even if your employer gives you an incentive to leave’. (https://www.fca.org.uk/consumers/pension-transfer)  This statement ignores the new realities and complex uncertainties of planning long-term income support in later life.

The benefits of a Defined Benefit pension may not be relevant to some people and, in fact, there are good reasons to consider transferring out.  That does not mean it will be right to actually transfer, but particularly with transfer values at such high levels, people may want to at least consider it because there are several potential advantages, particularly after the changes which have made Defined Contribution pensions far more user-friendly, tax efficient and effective for later life planning.  In the past, transferring out of a Defined Benefit scheme offered much lower values and people would often need to buy an annuity which represented worse value than their scheme benefits.  But in the new DC landscape, people have more flexibility and choice as to how to use their pension fund as best suits their circumstances.

People with a few DB pensions from previous employers, some paying quite small amounts of income, might benefit from transferring thousands of pounds from some of their DB schemes into a DC pension instead.  With transfer values having risen significantly, a pension of £20 a week could give £20,000 – £40,000 for a personal pension.  Those who are still working and have other secure pension income, could benefit from having the money in a DC scheme which can grow tax free and stay there for them until they are much older, perhaps even to help fund care or be passed on tax-free to loved ones.

Of course, Defined Benefit pensions do have advantages over Defined Contribution arrangements.  Here is a list of many of those advantages:

1. DB schemes pay lifelong pension income – you can plan your lifestyle without worrying about market falls
2. If you live to a ripe old age, your income should still carry on
3. Even if the company in charge of your pension scheme fails, you are protected by the Pension Protection Fund (although the level of PPF benefits can fall in future if too many schemes fail)
4. You don’t have to worry about what to do with your pension fund or how to get income, those decisions are made for you as the promised income (or PPF benefits) should just be paid to you for life
5. You don’t have to worry about investment performance, that is taken care of by others
6. Defined Benefit schemes also pay some pension to your spouse if you die first – and some will pay something to dependent children too
7. Any pension income that relates to membership of a scheme since 1997 has to have some inflation protection (and some schemes do offer inflation protection before that too)
8. Many people had part of their state pension in their final salary-type scheme and this is protected by extremely generous annual uprating every year until you reach pension age (unbelievably generous in many cases)
9. Tax treatment for Lifetime allowance is more generous for DB than DC schemes

Why these advantages may not always be as brilliant as some people think

1. If you are in poor health, you will not get much out of your employer scheme, whereas with money in a personal pension, you can pass the fund on tax-free
2. If you are currently healthy but die soon after reaching pension age, you cannot pass any pension fund on – your pension dies with you as you have no ‘fund’
3. If you are single, the spouse’s pension has no value to you
4. A spouse’s pension is only a fraction of your full pension, usually half your previous pension
5. If your pension relates to an employer you were with before 1997, you may have no inflation protection in your promised pension
6. When you draw your pension income, if you are still working you will be taxed on it, possibly at higher rates, whereas if you have the money in a DC fund you can keep it tax free until needed
7. Although the pension income should be guaranteed for life, there is a chance that your scheme will fail, and the income you were promised could be cut. This needs to be factored into your decision, especially if the employer sponsoring the scheme is in difficulties.
8. If you have a very high level of income from your Defined Benefit pension scheme, it can be severely reduced by the PPF cap.
9. PPF benefits could possibly be reduced in future if too many schemes fail (although at the moment the fund has been run very well and is in surplus so this currently seems unlikely.)

Potential advantages of transferring out of a DB scheme into a DC scheme

1. If you die relatively young, you can pass on your pension fund to whoever you wish. If you die before age 75, it will pass on free of all tax, whether it is spent now or in future.  If you die after age 75, you can pass it on tax free and it stays tax-free until the person who inherits it takes money out.
2. Your spouse can inherit your pension fund in full (rather than only a fraction of the income)
3. If you have other guaranteed income, you may find a capital sum more useful
4. You have ownership of an individual pension fund in your own name instead of an income entitlement that is either fixed, or rises by inflation or a small percentage each year
5. You can be in control of your own investments and have a chance to grow your eventual pension
6. Transfer values are at record highs, so you will receive a large sum of money if you transfer. For example, a small DB pension worth £500 a year for life, could actually give you a capital sum of £10,000 – £20,000 to put into a DC fund.  A DB pension that would pay £20 a week for life, could give you £20,000 – £40,000 capital sum to invest in a DC pension arrangement.
7. If you have other pensions elsewhere, (many people have more than one DB pension from past employers), then transferring some smaller pension entitlements can give you a fund that you can invest for future growth, but can also be there to pass on to others or to support you if you become ill or die young.
8. If you need money to pay for social care and especially if you have no other savings that could fund such expenditure, then having a pot of money in a tax-free DC pension could be a sensible way to build up a ‘care’ fund. One in four of us is likely to need thousands of pounds for social care in later life, but almost nobody has money set aside for that purpose.  Exchanging a small amount of lifelong pension income for a lump sum that can grow over the years to help with care costs can be a sensible choice for some.
9. If you need to repay debts or a mortgage, you may benefit from using some of your DB funds even after paying tax – but make sure you get advice on how much tax you’d need to pay

Potential disadvantages of transferring out of a DB scheme into a DC scheme

• You give up a lifelong income stream
• You will have to pay fees on your DC pension fund which might reduce your future pension income
• Your fund may have poor investment performance, so your future income may not be as high as the pension you gave up when you transferred
• You will have to monitor your investments in a DC scheme for future years, whereas the DB pension is looked after by trustees and just paid out to you over regularly over time
• You may find you go over the lifetime limit on DC pensions and have to pay tax – make sure you get advice on your tax position before deciding to transfer out

You really should get financial advice:

If your transfer value is worth over £30,000 you have to have an independent financial adviser to help you, but even for sums below that it is worth considering paying an adviser to help.  The decision is individual and will represent a complex balance of risks and potential benefits.

Here are some questions you need to think about and discuss with an adviser before making a decision – and don’t forget, once you’ve transferred out of a DB scheme, the decision is irreversible.

12 of the questions to consider before transferring from DB to DC:

1. Is this just one of a number of pensions and I want to cash some in and leave the rest as income?
2. Do I have other secure pension income?
3. Am I in poor health and not expecting to draw the guaranteed pension income for very long?
4. Am I still working and intending to keep on doing so?
5. Will I pay higher rate tax on my pension income?
6. Do I want to pass pension assets on tax free to the next generation if I don’t need them myself?
7. What will I live on for the rest of my life?
8. Do I need a guaranteed income for myself or a partner?
9. Do I have other monies that could help fund care or might I want to use this?
10. Do the DB pensions I have offer inflation protection (not all pensions accrued before 1997 will have inflation linking)
11. Am I happy to pay fees and keep investing to grow my fund further in future?
12. Do I understand the tax implications of transferring out (BEWARE, this is complex!)

Conclusion:

Understand the issues before making any decision about transferring out of a DB scheme.  It may be right for you, especially if you’re in poor health, or you have other pensions, or are still working and want to benefit from future investment returns (accepting the risks and costs of course).  With current very high transfer values, (driven up by exceptionally low gilt yields following the Bank of England’s policies that have artificially depressed interest rates) many people are thinking about this.  There are advantages and disadvantages and a complex array of risks and benefits that you should consider for yourself.  Finally, make sure you get financial advice so you understand the tax and cost implications.

23 March 2017

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

Summary of my views:

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

• People under age 45 will get no state pension until age 68.
• Just increasing state pension age prolongs disadvantage for occupations and regions with known lower life expectancy.
• I hope this review will help pave the way to end the increasingly unfair triple lock.

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.

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 21^st Century UK society.

28 February 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

28 February 2017

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

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

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

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

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

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

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

 It’s time to consider better approaches to managing state pension costs than just keeping triple lock and increasing state pension age: Government must consider how to manage State Pension costs more fairly than just continually increasing the State Pension age, which unfairly penalises people with lower life expectancy and long working lives.

Consider other factors than just chronological age: Realising the inefficiency and unfairness of the triple lock, and the problems created by continually increasing state pension age, can help improve the operation of state pension policy in future. Those who are in poor health, have much lower life expectancy or have had very long working lives may need pensions sooner. Making them wait longer before they can get any money at all will feel unfair.

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

20 February 2017

• DWP seems rather complacent about sustainability of UK Defined Benefit pension schemes
• Nearly 90% of schemes are closed and Government needs proper planning for members in future years
• Burdens of Defined Benefit schemes will increasingly put younger workers’ pensions and jobs at risk
• Using annuity costs as a yardstick is unreasonable, unaffordable and unsustainable for most schemes

Complacency based on short-term view: The DWP has today produced its long awaited Green Paper on the affordability of Defined Benefit pension schemes. The document is a wide-ranging roundup of the issues impacting employers and pension scheme trustees in light of large deficits in most UK DB schemes. The overall tone of the paper is based on an assumption that there is no real crisis in pension affordability and that employers can generally afford the liabilities they are sponsoring. This complacency reflects short-term thinking, whereas this Green Paper should be an opportunity to plan for the longer term outcomes for members of such schemes.

Government should be planning for medium-term risks now as schemes in run-off: From a medium-term perspective, it is clear that the Government needs to put plans in place to manage the run-off of Defined Benefit pension schemes. Nearly 90% of all schemes are now closed to new members, more are closing all the time and once the scheme has closed to new members, it is effectively in run-off. It is only a matter of time before it closes to new accruals too. If we wind forward a few years, it is clear that fewer and fewer workers will actually be in these pension schemes and employers will be sitting on a legacy liability that has nothing to do with their business at all. It relates to people who will no longer be working for them and they will have little or no business interest in supporting the scheme. This will entail greater risks to the PPF. Any period of economic weakness is bound to lead to greater sponsor insolvency and we should be planning for such problems now, as it will take some time before arrangements can be agreed and established. Ongoing support for DB schemes will increasingly damage younger workers’ pensions and job prospects.

Younger workers’ pensions and job prospects damaged: The ongoing Defined Benefit pension schemes will also increasingly make workforce rewards inequitable, with the older, longer-serving workers who may still be in the DB scheme having far better pension benefits than the younger, newer employees who will have DC pensions with lower contributions. The Green Paper suggests the cost of pension accrual for a typical UK DB scheme has risen from around 24% of salary in 2009, to around 50% of salary in 2016. Average contributions to DC schemes are nowhere near these levels. The greater the cost of supporting the legacy DB scheme, the lower the resource potentially available to pay into younger, newer workers’ DC schemes. This is bound to lead to tension, with employers looking for ways of removing responsibility for these legacy liabilities. It is highly likely that employers will simply not be willing to support such schemes in the longer term, so a plan is required for managing the pension payments in the longer term.

Consolidation is one solution that makes sense: Establishing a Central Discontinuance Fund or ‘SuperFund’ that can pool many schemes together, reduce running costs and take advantage of more diversified asset allocation would cut costs and enhance potential benefits. Local Authority schemes are already being required to merge their investment allocations – such models could be used for private sector schemes in future too.

Broader asset allocation is still needed – Myners Review called for this in 2000!: The Green Paper is right to call for broader asset allocation strategies and greater exposure to alternative asset classes. It is rather ironic to see this discussed today, in light of the fact that I first wrote about this when helping set up the Myners Review for the Treasury in 2000. Pension changes seem to take an inordinately long time.

Relaxation of annuity requirements would help: The Green Paper does not sufficiently explore the need to relax the requirement for schemes to buy out benefit in the annuity market. Annuity purchase is punitively expensive for most schemes, the current interest rate environment had increased the costs significantly and there is simply not enough volume in the annuity market for all schemes to buyout anyway. It is time to set up an alternative self-sufficiency regime, that does not require annuity purchase.

Overall, the Green Paper will generate useful debate, but the need for action is greater than suggested by this paper. Many employers are struggling with DB scheme costs and as we leave the EU, British businesses will have many other issues to deal with. A system that helps them manage legacy liabilities is needed for the coming years.

4 January 2017

• UK private pensions are in mortal danger – their huge benefits seem under threat
• Anyone who cares about pensions should be very, very worried
• Latest Treasury info doesn’t mention pensions when educating the public about retirement saving
• Future generations face worse later life income if Treasury succeeds in undermining pensions
• ISAs are sub-optimal way to provide for later life and will saddle future Government with rising pensioner poverty – pushing more costs onto the young
• Now is the time to promote the benefits of pensions so people understand 

The Treasury has just released an infographic for the public, which shows how to save throughout the lifecycle, but doesn’t mention the word ‘pension’. This is further evidence of the concerns I have expressed before about Treasury attitudes to pensions.  It suggests that our private pension system is under existential threat.

Treasury sees pensions as a cost, but they are a real benefit to millions of people:  During my time as Pensions Minister, there was clearly a difference of view between Treasury and DWP about private pensions.  The Treasury sees them as a cost to the Exchequer.  DWP sees them as a benefit for people to give them a better later life standard of living.  That is how most people see them and why they are so important.

Treasury trying to promote ISAs but who is promoting pensions?:  Having battled against the Lifetime ISA, it is deeply troubling to see the latest public information from the Government, talking about ‘ISAs and other savings options’ which omits to mention pensions when saving for retirement.  The huge advantages of pensions are totally ignored.

Anyone using a Lifetime ISA, instead of a pension, is likely to end up with less in later life:  Private pensions are far better than ISAs in terms of their behavioural design.  Using a pension, instead of a Lifetime ISA, should ensure you have more money in later life.  Future Governments will have to deal with the consequences of more poor pensioners, and greater strains will fall again on younger generations.

Pensions have many advantages over ISAs:  Pensions can give you free money from your employer, more Government contribution to your savings, controls on the charges, better investment options for long-term growth and behavioural nudges to stop you spending the money too soon.  The pension can pass on tax-free to your loved ones, or can keep growing as you get older and provide a fund to help pay for care if you need it as you get older.

Using ISAs will mean less money in later life:  ISAs are more likely to be held in cash (giving lower long-term returns), have no controls on charges and encourage you to take all the money as soon as you can, unlike pensions which have incentives to stop you spending the money too quickly.

The big problem with pensions is that many people do not appreciate their huge benefits:  It is time for the pensions industry to start promoting the advantages of using pensions to provide for later life.  We need an advertising and marketing campaign to tell people why pensions are so valuable, we can’t assume everyone knows.  Just saving in cash in an ISA is not a good way to provide for later life.

If you care about private pensions and believe they are worth fighting for, now is the time to stand up and shout about their benefits:  Before it’s too late and they are supplanted by an inferior product because of short-sighted policymaking that will leave long-term dangers.