In my last article, I considered the severe challenges facing the UK in funding pensions for today's and future pensioners. In this article, I assess the actions that the Government is pressing for and take a view on whether these measures will stimulate the growth of pension savings.
Simple tax legislation
The Treasury published proposals last December to simplify the taxation of pensions radically. Following wide concern about the proposed lifetime allowance of £1.4m, the Chancellor asked the National Audit Office to verify that the maximum fund in his proposals would only have an impact on a very small number of high earners.
In the March Budget, the Chancellor announced that the lifetime allowance is to start from a base of £1.5m. He also announced that the introduction of the new simple tax regime is to be deferred a year until April 2006 (A-Day) to allow all interested parties more time to prepare.
Industry reaction to the creation of a single code has been generally positive but many believe the measures to remove red tape could have gone further.
The Treasury appears to remain concerned over tax abuse by the few, with the consequence of baseline checks required at A-Day on accumulated funds. The communications explaining the new rules will be complicated, even for the vast majority whose savings will be modest compared with the maximum limits.
Simpler rules will lead to fewer, simpler products and medium term, after transitional work, should mean improved service to customers. That said, the taxation rules will still seem complicated to consumers and the new tax treatment does not provide further incentives needed to stimulate growth in pension business.
The Government has talked about big reforms for pensions for the past 18 months and firm intentions were finally announced in the Pensions Bill published in Feb- ruary. The Bill sets out several reforms, by far the most interesting and controversial is the Pensions Protection Fund.
The PPF will affect emp-loyers with final-salary schemes. PPF is essentially a compensation scheme hastily devised following the increase in scheme closures.
In some situations, members have had accrued pension rights cut back because the scheme is underfunded. Scheme wind-ups have generated a lot of negative publicity and the Government decided to act.
The PPF will come into effect in April 2005. It will not be retrospective so members of schemes that closed before that date will not get any redress.
The PPF will be financed by a levy on all schemes, with underfunded schemes paying a higher levy.
Will the PPF encourage greater private provision? The worry is that it could actually have a negative impact. It must be acknowledged that employers set up final-salary schemes on a voluntary basis and are legally entitled to close them.
A concern for employers with well-funded schemes is that the levy that they pay will help to cross-subsidise employers with poorly funded schemes.
Many employers will see this as yet another unjustified cost and for some it could be the final straw – with the company deciding to give up providing final-salary pensions and switch to some form of money-purchase scheme.
Historically, these switches have proved detrimental to employees overall pension expectations.
Some commentators believe the Government will need to act as a guarantor in the event the PPF runs into significant deficit, if this compensation scheme is to meet its objectives of raising members' confidence that entitlements will be met. However, the Government has gone on record that the PPF will not receive any public money.
The Pensions Bill also includes other changes, namely:
Formation of a new pension regulator, (largely changing Opra into a more proactive body that seeks to solve problems rather than react to whistleblowing).
Greater incentives for pensioners to defer drawing state pensions – such as taxable lump sums.
Scrapping of MFR to be replaced by scheme based funding standards.
A reduction in LPI from 5 to 2.5 per cent per annum or price inflation if less for service after April 2005.
Changes to rules for member nominated trustees and extension of the TUPE rights.
Many of these measures are of a technical nature and will not directly rejuvenate the growth of private pensions, although they will create more work for providers and advisers.
In summary, do the measures in this bill solve the problem of financing pensions for future generations?
Our conclusions are that they will have minimal positive impact. This Government has missed a vital opportunity to act in order to boost private pension savings.
It could have done so and relieved the pressure on the state pension system that is badly creaking and will eventually break under the demographic strain.
Eventually, this or some future Government will rec- ognise that the state pension system will only work if it is a safety net for far fewer pensioners – those who genuinely cannot fend for themselves.
To bring this about requires a vibrant private system that encourages workers to save enough for a decent income in retirement.
We need to continue to press politicians for a long-term strategy.
In my final article, I will discuss some of the opportunities and solutions that the Government could embrace to avert a national pension crisis.