View more on these topics

Bill of rights

The headlines over the recent Pensions Bill have centred firmly on pension reform and the introduction of auto-enrolment and the personal accounts scheme. But this bill is not a one-trick pony. It also tackles other areas of pension rules.

It brings forward the proposals arising from the deregulatory review of occupational schemes. This review, carried out last year, aimed to remove legislative burdens to help employers manage costs while maintaining an appropriate level of member protection but this is a difficult balancing act to pull off in practice.

Probably the most contentious of the bill’s proposals is to cap revaluation for early leavers at 2.5 per cent to cut future costs.

At the moment, revaluation – the increase of pensions benefits for those who leave defined-benefit schemes – is set as RPI, capped at 5 per cent. This proposal is creating talk, as some believe it is necessary to help employers manage – and by that I mean limit – their costs in the future.

The other side sees it as reducing members’ benefits. True, it will only apply to the increase of benefits built up after a certain (future) date so it does not affect anything already built up but cutting revaluation erodes the value of members’ future benefits.

It is also hard to see what will be achieved by this. The Government says the move will save employers £250m but will that be enough to encourage employers to stick by the defined-benefit pension scheme after all, especially if it is closed to new members and is to all intents and purposes gradually winding down? The recent NAPF survey showed that two-thirds of private sector schemes are in this position.

Another way of reducing costs for employers is to change the rules on indexation or increases in pension once in payment. The Conservatives have tabled an amendment to the Pensions Bill to allow for conditional indexation. This is where the employer only increases pensions to the extent that the scheme can afford it, measured against set criteria on a year-to-year basis.

This approach seems to work in the Netherlands. It allows the Dutch to say that their defined-benefit schemes are solvent because the increases do not need to be counted when totting up the liabilities of the scheme.

The trouble with applying it in the UK is that legislation over the last 20 years has moved so much in the opposite direction of adding layers of protection for members’ benefits that we would find ourselves in the situation of reducing peoples’ expectations. It would also draw an uncomfortable comparison between private sector and public sector pensions, most of which still enjoy full inflation-proofing.

On a positive note, the Pensions Bill includes two sets of improvements for those looking to get a share of pensions in divorce settlements, mainly women. The first allows, for the first time, for pension assets in pension protection fund to be split on divorce. This does not fall under the pensions and divorce regulations as PPF funds are compensation and not a pension benefit.

The second proposal is to bring safeguarded rights – the contracted-out element of a pension credit received on divorce – into line with protected rights. This means they can be taken from age 50 (rising to 55 by 2010) rather than age 60 and people can take tax-free cash from them.

This is fantastic news and long overdue. Many women would like to take tax-free cash from their safeguarded rights fund or to move this money into unsecured pension but are not allowed to do so, even though their ex-husbands can do this with protected rights.

Removing this anomaly gives women the freedom to use their own benefits to buy the right type of income to suit their needs in retirement and removing unnecessary rules to give people more control and flexibility is surely what a Pensions Bill should be all about.

Rachel Vahey is head of pensions development at Aegon Scottish equitable

Recommended

Land Registry shows 0.4% dip in prices

Land Registry figures show house prices in England and Wales dropped by 0.4 per cent in December, the first fall since August 2005. The average price is £184,469.

Commercial conditions

The times are certainly changing for retail investors in property funds. There is so much news around covering commercial property fund redemptions by retail investors such as Aegon stopping customers from withdrawing their money from the £2bn Scottish Equitable property fund run by Morley Fund Management.

Half of Co-op pension clients opt for ethical fund choice

Co-operative Insurance says around half of its new pension investors are putting money into ethical funds.Figures reveal 47 per cent of new CIS personal pension customers are investing in funds that invest in ethical companies. The statistics show men are 17 per cent more ethically motivated than women when arranging their pension investments. The average […]

Standard Life announces extra £800m of with-profits bonuses

Standard Life has announced that an estimated £800m of bonuses will be added to its with-profits plans in 2008.Its with-profits bonus declaration states that bonus growth rates for unitised with-profits bonds will increase from 2 to 2.5 per cent per annum and from 1.5 to 2.0 per cent for other life plans.Standard Life says where […]

A modern horror story

Every day a quick scan of the news reveals some new horror that will change the lives of those involved forever – the unlucky accident on the way to work, a tragic illness that cuts a young life short or the holiday accident that leaves more than just a scar to cope with. We barely […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment