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Defined benefit pension schemes Green Paper

20 February 2017

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

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

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

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

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

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

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

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

February 20, 2017   1 Comment

Help people use pensions and savings to fund social care

8 February 2017

  • Care crisis is worse than pensions crisis – but pensions and savings could help fund social care
  • Many baby boomers have pensions and ISAs but no incentive to retain money for care
  • Chancellor’s Budget could consider tax-free pension withdrawals and IHT-free ISAs for care savings
  • Such incentives would let people know they need to prepare for care costs  
  • Have to get real about the scale of care challenge – need combination of public funding, national insurance, private savings and integration with healthcare

The UK crisis in social care is potentially far worse than the pensions crisis:  Both issues are a function of our aging population, which is a good news story.  But, because successive Governments have failed to properly prepare, it is turning into a disaster.

No money aside to cover the inevitable costs of aging:  There is no money at Government level – it’s all left to cash-strapped councils who cannot cope.  There is no money at private level either, because most people have not seriously considered this issue, wrongly assuming the NHS will look after them or their loved ones.  This is short-sighted policymaking at its worst.

Advanced old age usually entails extra spending: With increasing numbers of much older people in this country, it is inevitable that more money will be needed to look after them in later life.  This should be no surprise.  An aging population is bound to need money for this but so far all the Government incentives and preparation for later life income have revolved around pensions, with nothing to pay for care.

Current cohort of older people is small, but will rise sharply in coming years:  The fact that the social care system is so poorly understood and that there are no incentives to help people plan for such costs just in case it is needed, has led to a complete lack of preparedness.  The cohort of older people needing care now is actually relatively small, but in 20 years or so the huge demographic bulge of baby boomers will increasingly need looking after as they reach their 80s.

Pensions could be adapted to help fund care:  However, pension income is not designed to cover the extra costs of care.  Nevertheless, pensions could be adapted to provide some help, as could other savings products, with a little extra incentive from the Treasury.   There is an opportunity to encourage baby boomers to set money aside in advance, in case they need care.

Millions of older people do have pensions and savings but they may spend them soon:  Of course, the majority of older people are not hugely wealthy but millions do have savings and pensions built up over the years.  The pensions crisis for future retirees is being addressed, belatedly, with a reformed state pension and auto-enrolment.  But for today’s sixty-somethings there is much more to be done.  With the new flexible pensions landscape, there is an opportunity to encourage them to keep some capital sums for later life, rather than planning to spend them straight away – and indeed for those who have ISAs, it is important to encourage them to consider keeping some of those funds unspent as a ‘Care Fund’ in case they need it.

New incentives in the Budget urgently needed to help fund care:  But an important part of the mix should be new incentives to encourage people to use their pensions and savings for care.  Here are some suggestions for the Chancellor.

Allow people to take money out of their pension funds tax-free if they use it for care:  Doing this would give people a further incentive not to spend all their pension fund too soon.  If they have money in their pension, but don’t think about using it for care, then by the time they need care the money may all be gone.  Signalling the importance of not exhausting pension funds too quickly would give an additional behavioural incentive for people to leave money aside in their tax-free pension wrapper as a potential ‘care fund’.  If they don’t actually need it, then the fund passes to their loved ones tax free, so it could form a care fund for a partner too.  Care costs are much higher for women than for men, because they live longer.  With a traditional pension, widows do not receive a capital sum to help them fund care and, under the old pension rules, once their husband had bought an annuity (the vast majority of which were single life) the pension died when they did.  Even if they had a joint life annuity, the widow only inherited a part of the income and no capital sum.  With the new freedoms, if the husband keeps money in his pension fund and does not spend it all on care for himself, the money will be available to his widow for her care if needed.

Relax the regulatory attitudes to transferring money out of Defined Benefit pensions: The current regulatory attitude strongly discourages transferring money out of Defined Benefit final salary-type pensions into a Defined Contribution (DC) arrangement.  This should be relaxed.  With the new freedoms for DC pensions, there could be many people who would benefit from such transfers.  Giving up a relatively small, guaranteed pension income might be the optimal decision for a family, particularly if they have other pension income and this is just one smaller deferred pension that will not make a dramatic difference to their lifestyle.  As an example, a £50 a week final salary-type pension could be worth around £100,000 as a transfer value.  If a husband and wife were to take a transfer of this size into a Defined Contribution pension, they may not miss the £50 a week, but they could hugely benefit from the £100,000 fund in coming years to help pay for care.  Transferring small deferred pensions can both help pre-fund care costs -and the surviving partner can inherit that sum in full, rather than just receiving a fraction of their deceased partner’s pension if it were still in the DB scheme.

Introduce special ISA rules for Care ISA funds – free of Inheritance tax:  Many older people already have ISA savings, but they do not think of retaining that money until much later life, as a potential ‘care fund’ to help them pay for care.  Some will spend the money on holidays, new cars, house refurbishment or for other needs but if there was a clear reason not to spend it, then there could be more money set aside for care within families.  Earmarking some of their ISAs for care, in a newly-created ‘Care ISA’ environment, could benefit many people in years to come.  The Chancellor could consider allowing people to transfer some of their existing ISAs into a ‘Care ISA’, or could allow an additional ISA allowance for care.  Indeed, the money currently spent on the Lifetime ISA as a 25% bonus would be much better spent on incentivising saving for later life care.

There is no one silver bullet that will solve the care crisis: A crisis is already upon us and there is no one magic solution.  However, a range of measures, when added together, can at least make a start in preparing the nation for care.  Savings incentives need to be part of the mix.  In addition, broader reforms could include a national insurance system to improve publicly available funding.  Better integration of health care and social care is also urgently needed, so that older people’s needs are specifically addressed in the most cost-effective way, instead of being artificially separated between wholly inadequate council funding and hugely expensive NHS care.  This could include keeping small local hospitals open as ‘convalescent homes’ where older people can be safely discharged and encouraging GPs to ‘prescribe’ preventive measures such as homecare, handrails, telehealth or personal alarms.  Funding for meals-on-wheels could be restored and better information and advice for families whose loved ones need looking after could alleviate some of the pressures too.

Government must get real about the scale of the challenge:  I urge the Government to act swiftly on this issue.  The system is already in crisis and is much more difficult to solve than the pensions crisis.  With pensions, ultimately, the Government has decided to make people wait longer and to pay them less.  Such options are not realistic for care.  Once people need care, you cannot make them wait longer without causing harm.  And we are already forcing people to accept less care, which is part of the crisis.  Now is the time for action, no more waiting and hoping.  One mark of a decent society is how it treats its older, vulnerable people.  We must not fail our aging population.

February 8, 2017   2 Comments

Lower immigration post-Brexit makes retaining older workers more vital than ever

5 February 2017

  • Wake-up call to business to use home-grown skills and experience of older workers
  • Over 50s women need specific help as they’ve been badly disadvantaged
  • Rethinking retirement can increase economic activity and national income short-term and long-term
  • 3’R’s vital to rethinking retirement – ‘Retain’, ‘Retrain’ and ‘Recruit’ more over 50s

In March 2015 I produced a Report as Business Champion of Older workers explaining the benefits of encouraging and enabling more people to work longer if they wish to.

I am pleased that the DWP has finally responded.  Two years have gone by and the importance of encouraging and enabling older people to keep working if they wish to, has increased significantly.  Much more work needs to be done. The new Business Champion for Older Workers is aiming to ensure many more older people can stay in work – that is to be applauded.

Brexit makes longer working life even more vital: As we prepare for Brexit and face reduced immigration, retaining more of our own older talent is more important than ever. We must make more use of British workers and increase support for later life working. With dramatic increases in life expectancy in recent years, plus the huge bulge of baby boomers reaching their 60s now, the opportunity to rethink retirement is urgent.

Longer working lives can be a win-win:  Helping more over 60s work part-time and facilitating flexible work, will enhance productivity and growth.  It’s a win-win, better for the economy, better for business and better for the individuals themselves, giving more people higher lifetime income and bigger pensions.

Older workers have valuable skills: Employing more older workers in an aging population will ensure the skills and experience of older British citizens are used more effectively, while also better meeting the needs of an aging customer base in many industries.

Older women face particular disadvantages: The Government also needs to recognise the particular position of older women.  The current cohort of women in their 50s and 60s has been particularly disadvantaged throughout their lives in terms of both earnings and pensions. These women were not included properly in the state pension system so they have lower state pensions than men – and their state pension age has been increased significantly without adequate warning. Many were excluded from workplace pensions, so they have lower private pensions too. When they had children they often lost out in terms of earnings and pensions. In addition, large numbers of these women are caring for older relatives and need more flexible work opportunities to enable them to keep earning. More flexibility, more support for women and closer monitoring of unconscious bias as well as outright age discrimination is needed to help overcome such disadvantage.

Big tax burdens on young if older workers retire too soon: Failure to facilitate fuller working lives will place a much bigger tax burden on younger generations and consign more older people to poverty. The best determinant of better off older people is whether or not they are still working. The aim of getting one million more over 50s to stay in work is important and the sooner we achieve it, the better for all of us.

Employers recognising benefits of older workers – using 3’R’s: The Government is building on the three ‘Rs’ concept introduced in my 2015 Report. Employers are increasingly recognising the benefits of ‘Retaining, Retraining and Recruiting’ older people in their workforce. The Business Taskforce that I established has continued its work and is now trialling initiatives that can help extend working life for those who want it, as well as helping older workers combine working with caring responsibilities, as will increasingly be required.

This is nothing less than a social revolution – and it’s already underway. More older people are working now than ever before, yet there is still much further to go. Even though life expectancy has risen by more than ten years in the past couple of generations, average retirement ages have fallen. What a waste of resources.

Working longer can boost pensions too: If more people keep working, perhaps increasingly on a part-time basis, they will still be earning money and many will be able to save more in their pensions as well as drawing on their private savings later, so they will last longer.

More initiatives needed: This is great news but there is still much to do. Whether it is more older worker specialists in Job Centres, or greater support for self employment, or mature apprenticeships and mid-life career reviews, we must do more to ensure older workers are engaged in the world of work for as long as they want or need to. The Government needs to recognise the importance of this agenda. Changing social norms is never easy, but it is vital to the future success of our nation.

I am delighted the new Business Champion for Older Workers team will be increasingly engaged with employers to promote this important agenda and wish them every success.

February 5, 2017   Leave a comment

Pensions are in mortal danger – beware

4 January 2017

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

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

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

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

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

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

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

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

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

January 4, 2017   1 Comment

The triple lock trick

4 January 2017

  • Oldest and poorest pensioners are not protected properly by triple lock as it only protects two parts of State Pension
  • Triple lock has kicked in for 2017/18 as earnings and prices rose by less than 2.5% but pensioners deserve proper protection, not just political gimmicks
  •  Keeping triple lock in future gives more money to better off and younger pensioners
  •  Healthier and wealthier pensioners get £200 a week State Pension by deferring while poorest and oldest get much less

Pensioners fall for politicians’ triple lock trick: Politicians have been using the triple lock as a lazy way of claiming to offer pensioners brilliant protection. However, delving more deeply into how it works, shows it is increasingly unfair.

The 2.5% element of the triple lock has kicked in for 2017/18: For 2017/18 the triple lock’s 2.5% was more than price inflation (cpi 1%) and earnings inflation (2.4%), so the 2.5% part of the triple lock kicks in – but only for two parts of State Pension – new State Pension and the basic State Pension of the old system. The other parts of pensions only have a link to prices and Pension Credit for the poorest pensioners is only linked to earnings so it will fall behind the new State Pension for the poorest pensioners.

Triple lock does not properly protect oldest and poorest pensioners: The triple lock is not protecting many pensioners. In light of the new State Pension system which started in April 2016, the triple lock leaves oldest and poorest pensioners relatively worse off, even though they need most protection. Older pensioners, who are on the old state pension will only have the basic State Pension protected – a maximum of around £120 a week, while newer pensioners have the full new State Pension of nearly £160 a week protected by the triple lock.

Triple lock policy impact seems the wrong way round: The much-trumpeted ‘triple lock’ on State Pensions has been used by politicians to pretend that pensioners are brilliantly protected. In fact, it is lazy policymaking, which seems to allow politicians to feel they are absolved from other needed measures to protect pensioners. The longer it is maintained, the more unfairness it will create.

Poorest pensioners on Pension Credit do not have triple lock promise: Pension Credit only rises in line with earnings. If the new State Pension (which is designed to always be above the Pension Credit level) remains triple locked, while Pension Credit only increases with earnings, then the poorest and oldest pensioners will become relatively poorer. The longer the triple lock stays in place, the more the State Pension favours younger pensioners and relatively disadvantages poorest pensioners.

Now is the time to consider better approaches to managing state pension costs than just keeping the triple lock and increasing state pension age: Government must consider how to manage State Pension costs more fairly than just continually increasing the State Pension age, which unfairly penalises people with lower life expectancy and long working lives. Realising the inefficiency and unfairness of the triple lock, and the problems created by continually increasing state pension age, can help improve the operation of state pension policy in future.

Healthiest and wealthiest over 65s can boost new State Pension to £200 a week: Under the new State Pension system, those pensioners who are in good health, have other income that pushes them into the 40% tax band or are still working, can choose to defer their State Pension and will get 5.8% extra for each year they delay. If they delay till they are 69 years old, they will get £200 a week. However, those who cannot afford to wait, or are in poor health, get much less.

New approach to State Pension needed from 2020: The Government should consider how to replace the triple lock promise from 2020 onwards, to prevent it from benefitting the younger and better off pensioners most. A double lock, increasing all parts of State Pension in line with the best of prices or earnings, would ensure pensioners keep up with the rest of society and the cost of living to prevent pensioners falling behind in future. And, of course, a double lock would still leave politicians free to increase more generously if they believe that is appropriate in any year.


Uprating for different parts of State Pension               Protected by             Rate of Increase 2017/18

Basic State Pension (max c.£122.30pw)                         Triple lock                   +2.5%

New State Pension (max c.£160pw)                                Triple lock                   +2.5%

Pension Credit (max c. £160pw)                                       Earnings                      +2.4%

Graduated Pension                                                             cpi                                +1%

SERPS                                                                                    cpi                                +1%

S2P                                                                                        cpi                                +1%

Deferral increases on State Pension                               cpi                                 +1%

Protected Payment for new State Pension                    cpi                                 +1%

Full triple protection does not apply to all elements of the State Pension: The triple lock means the maximum Basic State Pension for older pensioners rises by 2.5% for a single person, from £119.30 a week in 2016/17, to £122.30 a week in April 2017. However other parts of the old State Pension (Graduated Pension, SERPS, S2P) only increase by cpi price inflation, which is 1%. In contrast, the new State Pension (replacing the old basic State Pension, Graduated Pension, SERPS and S2P) will rise by the full 2.5% of the triple lock, from a maximum of £155.65 a week, to £159.55 a week from April 2017. Clearly, the triple lock promise gives much better protection to the newest pensioners – many of whom will still be working and are not those who need most protection in future.

January 4, 2017   1 Comment

A pension scandal ruining good people’s Christmas

23 December 2016

  • Major pension scandal destroying people’s lives
  • Family plumbing firms face financial ruin due to flawed pension laws but big firms walk away
  • Good employers, who’ve paid their contributions properly into an industry-wide plumbers pension scheme, face personal bankruptcy by pension rules
  • The law forces them to pay for pensions of thousands of workers who never worked for them – 400 employers saddled with debts for 4000 others
  • Some are on the brink of nervous breakdowns or worse after being let down by our system

As we approach Christmas, spare a thought for victims of flawed pensions laws.  A pension scandal which has so far failed to gain much attention is ruining good people’s lives.  It involves small plumbing firms who face personal bankruptcy because the law forces them to pay for pensions of people who never worked for them.  Many are family-owned businesses with no limited liability protection and will lose their homes and everything they have.  They are on the brink of nervous breakdown or worse.

Ruined financially for doing the right thing:  These plumbing industry employers just wanted to offer a decent pension to their handful of employees.  They paid into an industry wide plumbing pension scheme which started in the 1970s.  Some employers have been contributing for their staff for years, always paying what they were asked to pay.  There are now only around 400 employers left in the scheme, but in the past there have been over 4000.  The remaining 400 are suddenly finding, if they need to retire or pass their business on to someone else, they may owe hundreds of thousands of pounds they cannot afford.  This money is demanded by law and they cannot avoid the debts.

Plumbing industry scheme was fully funded in 2014, but has huge deficit now:  In 2014, the actuarial valuation showed the £1.5billion industry-wide multi-employer scheme was fully funded on the basis of paying pensions as they become due over time.  Since then, interest rates have plunged and annuity costs have soared and, if the scheme needed to buy annuities, it is estimated to have a £1billion deficit.

Forced to pay cost of annuities for their own employees and thousands of other people who never worked for them:  Once these small employers have no more employees in the scheme, or if they are too ill to manage their business, the law requires them to pay ‘Section 75 debt’.  Under these rules, they must immediately help meet the notional cost of buying annuities for hundreds or thousands of workers who are nothing to do with them, as well as for their own few staff.  These poor plumbers, who are unincorporated firms, family businesses, or partnerships, are required by this flawed legislation to pay for the workers of past employers who have left the scheme or gone bust.

Like ‘Hotel California’ they can try to check out, but can never leave:  These people are effectively imprisoned by their pension scheme and face bankruptcy, the loss of their homes, their business and their whole life savings if they leave the scheme.  Unlike BHS, these small employers cannot just sell their business to someone else and hope all will be ok.  They cannot even transfer it from father to son.  They cannot retire.  They cannot move their employees to a new pension scheme.  If they do any of these things, they will owe so much money that they face financial ruin.  There is currently no way out for them and their families.  They have been begging the Government to help them but so far nothing has been done.

Here are just a couple of examples:

A plumber took over his grandfather’s business and put his two employees into the pension scheme in the 1980s.  He is now 67, needs to retire and wants to pass his business to his son.  But doing either of these things would mean he becomes liable for huge sums he cannot afford.  He would lose his home and be made bankrupt, with nothing to live on in retirement.  He can see no way out.  He is stuck, held hostage by the pension scheme.

A few years ago, another man took over the plumbing business his father started in 1982.  He now has a young family and, after difficult trading during recent years, he employs just one plumber who is still in the plumbing industry pension scheme.  He would like to close the business but has suddenly discovered that this means the law would require him to pay £1.7m which of course he cannot afford.  More than half of this money relates to pensions for thousands of past employers who are no longer in the scheme).  He says he feels ‘totally destroyed, depressed and worried beyond belief’ and ‘just wants to curl up in a ball and die’.

What can the Government do?  Ministers must address this scandal quickly.  The Work and Pensions Select Committee has also called for urgent action to address the inadequacies of the current Defined Benefit pension system, but the Government is showing no sense of urgency here.  The legal framework for Defined Benefit pension schemes needs to be adjusted to recognise the unintended consequences of the current system.  As Pensions Minister, I initiated work on this in Summer 2015, but 18 months on and still nothing has happened.  These employers have not tried to walk away, they have not chosen to underfund their scheme, they are innocent victims of flawed legislation.

Government needs to act swiftly:  In recent months, the Government has issued consultations on Tata Steel and many minor pension matters but has done nothing for the plumbers affected.   I did highlight this problem in my evidence to the Work and Pensions Select Committee (see paragraph 29 of their latest Report ) and also raised it during the Committee debate on the Pension Schemes Bill in the Lords, but the scandal drags on.

Section 75 debt rules need to be adjusted – more flexibility for annuity requirement and joint and several liability:  A new approach to employers leaving their multi-employer scheme is needed, with flexibility to accommodate unincorporated or small employers in non-associated multi-employer schemes who have been inadvertently caught out.  The rationale for Section 75 debt was to ensure employers cannot just dump their pension obligations onto the PPF or onto other employers, but the way it is operating in the case of such multi-employer schemes is patently not what was intended.  These employers are not trying to dump their liabilities, but are being forced into bankruptcy by unfair law.  The strict annuity requirements should be relaxed and these small employers should not have to pay for employers who are nothing to do with them.

ITV’s Joel Hills will be highlighting this injustice at 6.30pm today 23rd December 2016 – I hope it will get good follow up in the New Year too so that the Government will sort this out with the urgency it deserves.

December 23, 2016   2 Comments

Is Government going to introduce saving incentives for social care?

14 December 2016

Jeremy Hunt is right we need for private savings to help fund care crisis

  • There’s no one solution but private savings must be part of the mix
  • Care costs much higher for older women than older men
  • Government can introduce tax incentives to help families save for care costs
  • Care ISAs, Workplace Saving Plans, Eldercare vouchers, Family Care Saving Plans free of Inheritance Tax
  • Consider using auto-enrolment and free Guidance to kick-start care savings as part of 2017 auto-enrolment review

Jeremy Hunt is right – people will need private savings to help fund later life care: Politicians have talked about social care for years, but have ducked the difficult decisions required to address this time and again.  Despite knowing that numbers needing care will rise inexorably, policymakers have not set aside public money, or encouraged private provision to pay for care.  The quality of care has suffered, many companies cannot afford to deliver decent care within the council budgets, and the screaming headlines from recent days continue to highlight that this crisis is just getting worse.

There is no money set aside for care:  There is almost no money earmarked to pay for the care people will require – not at public or private level.  Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Problem is worse for older women than for men:  The CII Report released yesterday on Risks in women’s lives found that this is a much worse problem for women.  The median man over age 65 will need to spend around £37,000 on later life care, but the median woman will need around £70,000.  Where will this money come from?  It either has to come from councils on a draconian means-tested basis, or the NHS (when early intervention or prevention is not funded), or individuals and their families who suddenly find themselves faced with huge spending they had not prepared for.  And of course older women are less able to save for their future needs because they are more likely to have to cut down or stop working to provide care for loved ones – society takes this free female caring for granted.

Families will need to prepare for some costs, but they need help.  Local authority care funding is subject to one of the strictest means-tests.  Most people will receive no help from the state until they have used up the bulk of their assets (down to £23,250) and until their needs are considered ‘substantial’, causing significant distress to many families and leaving the majority of families without the care their loved ones or they need.  Many suddenly have to find significant sums at short notice.  Ideally, money is needed for prevention and early intervention, so that people can have a little help or pay for measures that will ensure they are safer and less likely to fall.  But they need to know what to do.

Products for care funding are inadequate.  There are some products already on the market to help people pay for care but they are expensive and will not help with prevention.  These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans, but each has advantages and disadvantages and they only help at the point of need, rather than allowing people to make plans in advance.

Encouraging saving for care could help.  It seems that Jeremy Hunt may be signalling that at last the Government recognises the importance of helping families prepare for social care costs in advance.  People don’t know they will need such sums, but if they spend all their pensions or ISAs before they reach their 70s and 80s, they may really regret not being able to pay for the help they need.  I believe Jeremy Hunt is correct, some private savings will have to be part of the mix.  21st Century retirement income is about more than just pensions.

Extra tax breaks to encourage long-term care saving.  We spend around £40billion on incentives for pension saving and not a penny on incentives for social care saving.  21st Century retirement needs more than a conventional pension to help fund later life.  Providing taxpayer incentives and employer incentives is important because the cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS and on younger generations as well as on older people.  Urgent action is needed to head off a disaster that is clearly on the horizon.

Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care or allow people to transfer existing ISAs.  Launching such ‘Care ISAs’ would itself help people realise the need to save for care.  It could allow up to, say, £50,000 or £100,000 per person to be earmarked for care spending and such Care ISAs could be passed on free of inheritance tax to fund Care Savings for the next generation too.

2017 review of Auto-enrolment could consider encouraging workplace care saving plans:  Alongside auto-enrolment, it might also be helpful to ensure that employers are encouraged to offer the option for people to save in a workplace savings plan that is set aside specifically for care.

Workplace Saving Plans and flexible benefits packages to include eldercare:  The Government needs to incentivise employers to help staff prepare for care costs.  This can include savings plans to build up a fund to cover care costs, and also such ideas as eldercare vouchers, along similar principles to childcare vouchers.  Employers can help their staff pay for someone to look after elderly loved ones, rather than having to leave work or suffer stress when such help is not available.  This could be part of a flexible benefits package, which receive an employer contribution.

Family Care Savings Plans – IHT free:  Another possibility is for families to save collectively for the care needs of their loved ones.  For example, parents, siblings or children might join together to build up a fund in case one of them needs care.  The probability is that one in four people will need care, but nobody knows in advance which one.  Tax breaks to incentivise this kind of saving, perhaps allowing them to be passed on free of inheritance tax, would help.  There is a role for insurance with such savings plans – which might also include some ‘catastrophe insurance’ to pay out if more than the expected number in any family or group actually need care.

Tax free pension withdrawal if used for care:  The new pension freedoms could encourage people to set aside money for later life care.  Now that the annuity requirement has been removed, and there is no 55% death tax, pension funds could help cover care costs.  Many people reaching retirement have tens of thousands of pounds in their pension funds but if they use this to buy an annuity, they will have no money to pay for care.  Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed.

Demographics show numbers needing care set to soar:  The cohort needing care at the moment is a relatively small proportion of the population, but millions of baby boomers are currently reaching their 60s and will need care in the coming twenty years or so. The numbers needing care are, therefore, set to soar.

Long-term care funding is one of the least understood parts of the health and care system.  Unfortunately, many people mistakenly believe the Government will pay their care costs.  But social care is the responsibility of local authorities, not the free NHS.  This system dates back to the Poor Laws of the 1800s and was completely omitted when Beveridge developed our National Insurance system and welfare state.  The difference between social care and healthcare is not easy to define, but as an example, someone with cancer is likely to qualify for healthcare funding with care provided at taxpayers’ expense, while someone with dementia may not be considered to have a ‘health’ need and gets no public money at all.

Public need to be informed about preparing for care:  We could extend the PensionWise Guidance service to provide information and education for people about preparing for care needs.  This could come from their pension savings or additional savings but because people don’t understand the system, they will definitely need help in planning for care.

The time to address this crisis is now:  It cannot wait longer without causing more misery.  Social care in this country is failing and radical action is long overdue.  This is not just about elderly people, it’s about families and loved ones who are being denied a decent standard of living in modern-day Britain.  Introducing incentives to help people save for later life care, as well as earmarking more funds from council and healthcare budgets, in an integrated fashion, will be vital parts of any solution.

December 14, 2016   1 Comment

Political courage needed for social care solutions

12 December 2016

Action to address care crisis cannot wait any longer – need a 21st Century revolution

  • Britain’s welfare state has never included social care – time for a rethink
  • Social Care system dates back to poor laws principles from the 1800s
  • Ultimately, National Insurance or tax will need to cover care funding
  • All parts of the system are failing and Government has not yet offered solutions
  • Private and employer provision can also help – such as Care ISAs, Family Care Plans, auto-enrolment, eldercare vouchers and free guidance

Britain’s welfare state, developed in the 1940s, was said by its architect William Beveridge to be a “British revolution”.  We need another revolution to fit with 21st Century lives as the population ages.

National Insurance was supposed to break away from Poor Laws, but social care was never included:  Our National Insurance system of benefits and support was designed to break away from the legacy of the Poor Laws, which were a harsh safety net, for those in dire need.  The 1940s welfare state aimed to establish a new, universal system on completely different principles, giving support for everyone, as of right.  However, social care did not feature in this new system.

NHS never included social care:  The National Health Service would give healthcare to all, free at the point of need, funded by taxpayers. However it did not factor in social care, which was left untouched and still the responsibility of local councils.  In the 1940s, the concept of millions of chronically ill older people needing a little help with their daily lives on a long-term basis was unthinkable.  Either their families or local communities would look after them, or they would not live very long.  21st Century life is totally different, but our social care system is stuck in the past.

Government must wake up to the reality that social care cannot be left unfunded:  Failing to fund social care means millions of people do not get decent, or any, care.  If Beveridge had realised the forthcoming population dynamics, he would have included provision for long-term care needs in the welfare state.  In the 70 years since our system started, no Government has taken this issue seriously enough – it’s time for a rethink.

Ultimately, taxpayers or National Insurance will need to fund social care:  There is little doubt that a 21st Century Beveridge would have included social care funding in the National Insurance system.  This is a clear risk now, which was not on the horizon in the 1940s.  Ultimately, Government will need to tackle the costs of social care provision at a national level, whether via the tax system or National Insurance.

The current cohort needing care is relatively small – it will grow significantly soon:  Demographic trends clearly signal a dramatic rise in the numbers of older people needing long-term care.  The current cohort of elderly people is relatively small.  However, millions of baby boomers are now reaching their 60s and will need care in the coming twenty years or so.  The Government has not planned for this huge looming cost.  Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Cutting social care provision is short-sighted and leads to long-term cost increases:  Social care provision by councils has been cut and cut in recent years.  Even as the numbers needing care have risen sharply, local authorities have reduced availability.  A few years ago, people with moderate needs could receive moderate amounts of help – now only those with substantial needs get any council care.  There is no help with prevention or early intervention.  That is a short-sighted saving causing extra long-term pressure.  And the amount of care being provided has also been cut – 15 minute visits are common, with no pay to careworkers for travel time between clients – which means the quality and dignity of care have also been reduced.

NHS at breaking point:  As increasing numbers of elderly people do not have their care needs met, they end up in the NHS after avoidable accidents, blocking the NHS system – as the NHS is the backstop with last resort funding from taxpayers.  This will put intolerable burdens on the NHS, on younger generations and on older people.  Urgent action is needed to head off a disaster that is clearly on the horizon.

Those who pay privately are subsidising council underspend:  Most people will receive no help from the state until they have used up the bulk of their assets, causing significant distress to many families and leaving the majority of families to find huge sums at short notice.  Even worse than this, local authorities are not paying the full costs of care for those they are funding via the means-test.  This forces care homes and homecare firms to charge private payers extra, to subsidise publicly funded residents.

Healthcare and social care must be integrated.  The current distinction seems arbitrary and manifestly unfair).  Until the Government properly integrates social care with healthcare and insists on higher standards across the industry, the current crisis will only worsen.  This should be a major political issue, but it is not receiving sufficient attention.  The public is not being adequately informed of the problems and possible solutions, leaving families struggling to cope and elderly people at risk in a system that is failing on all fronts.

The £72,000 cap is not a solution. The £72,000 cap was supposed to ensure nobody has to face catastrophic care costs, but it does not solve the problems of our system.  It is one small part and the £72,000 cap was set too high to achieve its original objectives.  In fact, it is not a £72,000 cap at all.  Most people will actually have to spend more like £140,000 on care before they receive any state help because the cap does not cover board and lodging costs (around £12,000 a year must be paid privately) and will not cover any money spent before care needs become substantial.

We’ve left it so late, there is no single solution but encouraging saving for care could help.  New products and approaches, together with new Government incentives, are urgently needed to help people prepare in advance for care spending if it is needed. A savings solution should be part of the mix.  This could include new tax breaks to encourage long-term care saving.

Tax free pension withdrawal if used for care:  Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed.  If they don’t spend it on care, it will pass free of inheritance tax to the next generation as the 55% pensions death tax has been abolished.

Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care.  Launching such ‘Care ISAs’ would itself help people realise the need to save for care.

Family Care Savings Plans – IHT free:  Another possibility is for families to save collectively for the care needs of their loved ones.  One in four people will need care, but nobody knows in advance which one.  Tax breaks to incentivise this kind of saving, perhaps also in the workplace, allowing funds to be passed on free of inheritance tax, would help.

Workplace benefits could help – such as auto-enrolment into workplace care saving plans or eldercare vouchers:  Alongside auto-enrolment, employers could be encouraged to offer the option to save in a workplace savings plan specifically for care.  This could be part of a flexible benefits package, which might also include eldercare vouchers to help families pay someone to look after loved ones, rather than having to stop work to do so.

PensionWise Guidance can help provide information and education:  The Government’s new ‘Pension wise’ free guidance service already tells people about planning for care costs and more people could use this service to help understand the system.

Message to Government – this cannot wait, it must be tackled now:  So, the message to the Government is that our care system is in crisis, there is no money set aside either publicly or privately to fund later life care adequately, and the time to address this crisis is now. There is no single silver bullet solution, a range of policies is required.   Social care in this country is failing, radical action is long overdue.

December 12, 2016   1 Comment

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

7 December 2016

Common sense prevails at British Steel – jobs secured

  • But not clear what will happen to British Steel’s 130,000 member pension scheme
  • New pension scheme seems generous compared to average UK schemes nowadays
  • But Tata says old British Steel scheme will be ‘de-risked’ and ‘de-linked’ – could mean going into the PPF or could mean standalone
  • Ongoing negotiations with the Pensions Regulator likely and no details yet available

 Saving jobs is so important for South Wales:  It is great news that the unions and Tata Steel have reached an agreement that could secure jobs and steel production at Port Talbot’s blast furnaces for years to come.  That is really important to the people of South Wales and it seems the unions have worked really hard to preserve the industry that is so important.  But this is all subject to consultation so it must still be ratified by the workforce.

Job security vs. pensions:  The job security and new investment in the business seems to have come, however, partly as a consequence of changes to the pension arrangements enjoyed by the 130,000 British Steel Pension scheme members.  By closing the scheme and looking to change future arrangements, Tata’s burden of ongoing pension contributions could be reduced.

Close DB scheme and start generous new DC scheme: The proposal is that the final salary-type pension scheme will close and all workers will be moved into a new pension arrangement.  This will be a Defined Contribution scheme, which means the employer no longer shoulders the risks involved in long-term pension provision.  The terms of the new scheme, negotiated hard by the unions, are relatively generous.  They will offer up to a maximum 10% employer contribution with 6% from employees.  The legal minimum is far lower (currently 1% each from employer and employees, rising to 3% from employer and 5% from employees by 2019).

But not clear what happens to existing British Steel Pension Scheme – still waiting for Consultation Response:  It is not clear, from today’s releases, what will be happening to the existing final salary pension scheme.  Will benefits be reduced by going into the Pension Protection Fund?  The Government consulted earlier this year on changing the law to force through significant cuts to the full benefits promised to current and past workers.  For Government to do this, for just one scheme, would have set a very dangerous precedent for all other private sector schemes.  We still have no confirmation of what will happen, even though it was rushed through as an emergency measure during the Referendum campaign last summer.  We still do not know when there will be an official response to this consultation.

Probably still negotiating with the Pensions Regulator – will scheme enter the PPF?:  The fact that there has been no announcement from the Government, and the wording of the statements today from Tata and the unions, suggest that no resolution for the British Steel scheme has yet been agreed.  The wording used is that the scheme will be ‘de-risked’ and ‘de-linked’.  This could mean that the scheme is heading for the Pension Protection Fund after all, but the trustees may also still be negotiating for a different outcome.

RAA would allow business to separate from pension scheme:  The Regulator does have the power to permit Tata Steel, the employer, to keep running the Port Talbot blast furnaces, but without the burden of the DB pension scheme  – and the scheme would enter the Pension Protection Fund.  This could represent the scheme being ‘de-linked’ and ‘de-risked’.  Such flexibility for employers who are in trouble is a long-standing feature of our pension system.  It helps firms who genuinely cannot afford to meet their pension liabilities but want to preserve jobs and keep the business going.  To allow Tata Steel to continue running the steel business but not have to support the old pension scheme would require a deal with the Pensions Regulator and the PPF Lifeboat Fund, an RAA or ‘Regulated Apportionment Arrangement’.

Or will Regulator allow a standalone scheme:  However, there is also a suggestion that the trustees are still looking for the scheme to be allowed to run on as a standalone scheme without actually going into the PPF.  This was the original premise of the Consultation but would require huge reductions to past benefits and would also involve ‘de-linking’ the scheme but it is unlikely to be completely ‘de-risked’ since the trustees would still need to earn investment returns over time to help meet the liabilities.  It could be a very different outcome for members from PPF entry and was another of the options suggested in the Consultation.  This would mean the scheme may not enter the PPF, but would stay outside it, with the trustees continuing the run the scheme on a low-risk basis, trying to ensure it has enough money to pay the pensions as they become due.  Whether or not they would be able to pay full benefits, or reduced benefits may also be part of ongoing discussions.

Key question – what will happen to guarantees given by Tata Steel to £15billion pension scheme?:  The future of the British Steel Pension Scheme may lie in the hands of the Pensions Regulator and the PPF – unless the Government does actually tear up pensions law for Tata – this seems less likely.  Which outcome is achieved, will also partly depend on what happens to the generous guarantees  that Tata Steel has offered to the pension scheme in the past.  It has been reported that a share of Tata Steel assets were pledged to the scheme trustees instead of pension contributions, in order to improve the deficit position of the scheme in past years and to provide extra funding if the scheme was in trouble.  If those assets are included as part of the pension assets, then the trustees may believe they have enough money to run the scheme on a self-sufficiency basis.  It may also, however, be part of the negotiations with the PPF and Pensions Regulator in order to agree an RAA deal.  Such negotiations are always complex and we await further details with interest.

So it’s great to see jobs secured and we await further details about the future of this major UK pension scheme.  The Pensions Regulator must ensure that it does its best to protect the PPF and the integrity of our pension system.

December 7, 2016   Leave a comment

Autumn Statement has a bit of good news for savers

23 November 2016

  • Autumn Statement is missed opportunity to address social care crisis
  • State Pension triple lock seems under threat
  • Chancellor confirms intention to ban pension cold calling

The Chancellor’s Autumn Statement had no real surprises for pensions or savers.  There are some tweaks to pension rules, but the biggest disappointment for me is that there is no acknowledgement of the social care crisis.  The Chancellor started by saying the aim of his budget is to prepare and support the economy for a new Chapter.  Part of this new chapter includes the aging of our population.  This is a huge social issue as baby boomers reach their 60s and are heading for longer lives than previous generations.

I’m delighted to see a greater sense of urgency for new infrastructure and housing investment, this is vital for the future success of our economy.  I hope that our own long-term domestic investment funds – in particular pension funds and insurance assets – will be brought into Government to ensure they can participate in such investments.  However, it is really disappointing that there were no new savings incentives to help families set money aside for social care and not enough extra public funding to ensure decent care can be delivered to those elderly people who are currently denied the help they need.

Here is a summary of the measures and my thoughts:

  • Chancellor has not recognised the scale of the challenge the country faces in social care

The Chancellor has missed an opportunity to really signal that the Government cares about the social care crisis.  The country has no money set aside for elderly care – families do not even know that the NHS cannot be relied on to provide care.  The NHS will step in under some circumstances, but most families will find that they have to fund care themselves.  If they don’t have any savings, then they will be at the mercy of cash-strapped councils who are cutting back care provision and provide only a bare minimum.  New savings incentives for social care are needed urgently, not just to ensure at least some families will save for care, but also to help people realise that they need to think about this.  The NHS does not and cannot look after increasing numbers of older people from cradle to grave.  In an aging population where it is estimated that over 1million older people who need care now are not getting it.  Without more funding this can’t be delivered.  Allowing councils to raise an extra £2billion in council tax for care by 2020 is simply not enough.  The needs are higher than that already and the problem is only getting worse.  Employers could be incentivised to help workers with care savings plans, perhaps with elderly care vouchers but currently there is no help at all for employers or employees to provide for future care needs.  This will have spillover effects on our precious NHS, because we can’t cut social care without hitting NHS.  So taxpayers will keep having to put more money into the NHS if there is not extra funding for social care.

  • Good news for pensions – Government will consult on banning pension cold calling and further measures to crack down on pension scams

It is great to see that the Chancellor has confirmed he will consult on banning all cold calling for pensions and also look for other ways to clamp down on pension scams and frauds.  This is most welcome.  By making pension cold calling illegal, it will be much easier to help people understand that those who do contact them out of the blue about their pensions are acting against the law.  We must do as much as we possibly can to protect people’s precious pension savings.

  • Triple lock looks under threat beyond 2020 – watch out for more developments

The Chancellor’s speech signalled pretty clearly that the State Pension triple lock is only safe until 2020.  He talked about the need to adjust to rising longevity and alluded to a review of State Pension uprating.  Currently, the law only requires Basic State Pensions and new State Pension to be uprated in line with earnings after 2020.  I would like to see a double lock announced, whereby State Pensions would rise in line with either earnings or prices.  Currently, the Additional State Pensions only rise in line with prices.  Perhaps the Government could consider increasing all aspects of state pensions in line with a double lock to simplify the system.

  • Reduced Money Purchase Annual Allowance cut from £10,000 to £4000. Why not to £3,600?

The Chancellor will reduce the amount of new money someone over age 55 can contribute to a pension after they have already taken some money out of past pension savings.  Currently, those who have already taken money out of their pensions under so-called ‘flexible access’, can put a further £10,000 a year into new pension savings and get tax relief on that.  The Chancellor plans to reduce that to £4,000 a year instead. This will raise revenue for the Treasury, but it does seem a shame that he did not decide to just reduce the new MPAA to £3,600 a year, which would align it with the maximum amount that non-taxpayers are allowed to pay into a pension with a 25% bonus of basic rate tax relief being added.

  • Encourage British pension funds and insurers to invest in infrastructure and social housing

The Chancellor has announced that it will extend the UK Guarantees Scheme for infrastructure bonds and loans and that it is working with ‘industry’ on construction-only guarantees.  I do hope the new Ministerial group on delivery of infrastructure projects will work closely with UK pension funds and insurers so that British people’s pensions and long-term savings can help fund long-term improvements in the British economy

Good news for savers:

  • A new 3-year NS&I savings bond with market-beating interest rate of 2.2% from next Spring

It is really important to encourage more people to save and these bonds will be of some help to savers who have lost out from Bank of England’s policies.  The Chancellor plans to bring back the special savings bonds that were offered to the over 65s before the 2015 General Election.  This will allow anyone over age 16 to put up to £3000 into a new National Savings and Investment product that will pay 2.2% interest.  It will be available for 12 months from next Spring.  This will help some savers who have suffered so much for exceptionally low interest rates.  There are already tax breaks for savers, who can earn up to £5,000 a year in savings income tax free but the interest rates on savings accounts have fallen so low that savers need more help.

November 23, 2016   Leave a comment