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A tough Act to follow

A change to a Government minister with a pensions brief is a significant event for our industry.

Sometimes there is a collective sigh of relief, such as when Helen Liddell moved on after earning a reputation as the scourge of the industry by naming and shaming companies she thought were dragging their heels over the pension misselling review. Sometimes there is regret at the loss of an innovative and generally sympathetic minister like Ruth Kelly, who has moved from the Treasury to help mastermind Labour&#39s election campaign.

Sometimes we do not know what to make of it, which is where many of us stand on the replacement of the largely anonymous Work and Pensions Secretary Andrew Smith with the largely unknown (in our industry at least) Alan Johnson.

Johnson has inherited a minefield, with every man and his dog telling the Government how it should diffuse the pension time-bomb. While the work part of Johnson&#39s remit will involve weighty matters, he is likely to be judged mainly on the pensions part in the short term.

Johnson&#39s first priority is to steer the Pensions Bill through Parliament – no easy job as the Bill has drifted badly. With around 250 pages of mainly turgid detail about the new regulator and the pensions protection fund, it is not surprising that MPs and peers are finding it hard going. To be fair, there are also some tricky issues, such as how to bring the European Commission&#39s Occupational Pensions Directive into British law.

The key point for us, though, is that the Pensions Bill is unlikely to become the Pensions Act before November but most of its measures come into force next April. That leaves little time to communicate its effects to scheme trustees and members and to make the necessary changes to computer systems. If it drifts further, its implementation must be deferred.

It is disconcerting that Johnson&#39s first major policy announcement was an amendment stipulating that 50 per cent of the trustees of a pension scheme must be member-nominated. Being a trustee is no picnic, especially with extensive Pensions Bill requirements for trustee knowledge and understanding, and it is hard to see where all these volunteers will come from.

Pushing the Pensions Bill through successfully will be a tough task for Johnson but after that he has the even more daunting challenge of the state pension system.

Reforming state pensions was high on Labour&#39s original priority list and it introduced the minimum income guarantee (later replaced by the pension credit) while also replacing Serps with S2P. The Government then felt it had cracked the problem and moved on to other things.

At one level, the changes have been successful. The revised system appears financially sustainable and gives increased priority to providing for the less well-off. However, pension credit is a disincentive to save – people who receive 22 per cent tax relief on the way in potentially lose 40p of means-tested benefit for every pound of pension paid out. So there are calls for further reform of state pensions, to which the Government has so far turned a deaf ear.

Outside the Government several interesting proposals have emerged. These generally involve providing a decency-level income from the basic state pension (or a replacement based on residence rather than National Insurance record) and funding the change by raising the state pension age and/or scrapping S2P. It is disappointing that the Government appears to reject such proposals out of hand.

Johnson should listen to those who have considered the issues in detail and then reach a well-informed decision on the best way forward.

Then there is the C word. The Government rightly sees compulsion as a last resort but he must address the issue sooner or later. This political hot potato appears to have been set aside until after the general election, when Adair Turner&#39s Pensions Commission produces its final report.

Meanwhile, Johnson and pensions minister Malcolm Wicks could consider the various incentives being sugg-ested to encourage individuals and employers to contribute more and to hopefully avoid the need for compulsion. He also needs to ensure that his department&#39s Informed Choice initiative produces workable proposals to improve public awareness and understanding of pensions.

If Johnson&#39s new job at the DWP looks daunting, Stephen Timms&#39 at the Treasury may be more straightforward. Kelly and her officials showed vision and determination in pushing through the pensions taxation reforms and have generally done a good job although simplification is awfully complex. It is particularly welcome that they allowed almost two years between passing the main legislation and the implementation date.

However, parts of the Finance Act appear to have been drafted hurriedly, possibly leading to unintended consequences.

These include a much more restrictive annuities regime than we expected and some anomalies in the protection of tax-free cash entitlements, depending on whether or not there are contributions after April 2006. Mistakes should be rectified. An early announcement of what changes, or if there will be none, are proposed is essential.

After that, Timms can join the DWP ministers in considering the financial aspects of the various proposals for pension incentives.


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