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Bleak House

Our great expectations are again dashed as few significant reforms have emerged

Another fast moving year in the hitherto mundane world of pensions saw no fewer than three work and pension secretaries hold what must be one of the most difficult ministerial briefs.

The year started with Alan Johnson’s refreshingly plain-speaking approach set out in his six principles for pension reform. In February, he said reform must tackle poverty, deliver adequate retirement incomes, be sustainable, be fair to women and carers, be simple and come with consensus, if possible.

Exactly 10 months to the day from Johnson’s declaration, the latest Work and Pensions Secretary, John Hutton, set out his five tests that reform must meet. Gone from Johnson’s list were commitments to tackling poverty, delivering adequate incomes and achieving consensus. Replacing these were the need to take personal responsibility for our retirement and to have a state system that is affordable.

The man in the middle was David Blunkett, returning from the political wilderness in May, just after the general election. Six months later, he was back from whence he came, his main contribution being the launch of a national pension debate in June. Not that we weren’t already having one before he came along.

In April, we saw the Pensions Regulator take over from the Occupational Pensions Regulatory Authority, when the first provisions of last year’s Pensions Act came into effect. The other headliner of that act was the Pensions Protection Fund, designed to bail out the beleaguered members of defined-benefit schemes whose employers go bust.

Conjecture around the PPF has centred on the potential cost of risk-based levies, the calculation of which is governed by, among other things, the financial strength of the employer and how well the scheme is funded. The latter measurement is still very much the subject of debate, with rules for scheme-specific funding still to be finalised. However, as widely predicted, this new funding standard simply requires more funds to be held to meet the pension promise than did its predecessor, the minimum funding requirement.

All things considered, the future of defined-benefit schemes looks bleak, the added cost of PPF levies and the requirement to make good scheme-specific deficits piling the pressure on financially weak employers with poorly funded schemes.

The Government’s preferred replacement for defined-benefit schemes is stakeholder pensions. These got a facelift in April, with the charge cap lifted from 1 to 1.5 per cent for the first 10 years. The other main change was the introduction of a new lifestyle default fund.

Some providers took the opportunity to raise comm-ission. To anyone with a calculator, the new commission levels appear unprofitable, eight or nine years’ worth of 1.5 per cent charges being necessary just to break even. Few pensions receive eight or nine years of contrib-utions these days. Well, it’s their loss or, more correctly, their shareholders’ loss.

Pension tax simplification continues to get more complicated. With 43 sets of new regulations and a schedule full of changes attached to the Finance Act 2005, many advisers have taken to covering their eyes and sticking their fingers in their ears at the mere mention of A-Day.

The guidance notes that go along with the new pension tax rules were slow to appear. These are the Revenue’s own plain English interpretation of the law. In basic terms, this means they are comprehensible to anyone with firm grasp of embedded value accounting.

Once again, it was left to Adair Turner and his Pensions Commission chums to send the year out with a bang, this time with the nattily titled, A New Pension Settlement for the 21st Century. However, as Alan Pickering (a previous report author) observed, concrete action is unlikely to follow swiftly. With a fair wind, we might just have the solution to the pension crisis by the start of the 22nd Century.


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Forward thinking

Six months after depolarisation, apathy has struck the market. Many IFA firms have found ways around the rules to maintain their existing status and have not made proactive steps to improve their business structure to reflect the needs of clients better.


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