Is there a serious danger that the incentives being offered by employers for members to leave final-salary schemes to join defined-contribution schemes will become a major misselling scandal? How common do you believe this practice is?Naismith: It is too early to talk about a possible scandal. Employers are looking at ways of reducing pension liabilities, particularly because of the implications of FRS17, and encouraging members to consider whether an individual pension might be better than remaining in the scheme is perfectly valid. Where any incentive is being offered, the employer and the scheme trustees need legal advice to avoid unfair discrimination against any group of members and those being encouraged to consider transferring need clear information and guidance. Subject to this, transfers by deferred members could benefit the members, the scheme and the employer. Buchanan: There is certainly potential for this to be a real problem. It is not clear that the offer of an incentive is a problem in itself. An employer offering membership of a pension arrangement, providing factual information but not giving financial advice suggests that an incentive to leave might be acceptable in some circumstances. This sort of approach is used fairly widely in the US. But any sort of encourage-ment by the employer or an adviser has clearly got pretty significant risks attached to it. Most advisers appear to be well aware of these risks. There is little evidence of incentives being used to date but certainly there is quite a bit of interest in it. Bamford: There is always a risk that any incentive might be viewed as a bribe and that accusations of misselling might be levelled at those who make such payments. If the cash-equivalent transfer value of a defined-benefit scheme was a true reflection of value, then no such incentive would be required. Anyone on the receiving end of such an offer should be very careful about accepting it. If it is in the form of cash, I can see why some would take the offer but it may not be in their longer-term interests. There is a growing trend for employers to introduce group self-invested personal pensions for their senior executives. Will this lead to a two-tier system of pension provision, with one standard for senior management and another poorer offering for everyone else? Naismith: Employers will do whatever is commercially necessary to attract highquality management and there is nothing new about senior executives being offered better pension arrangements than their staff. The key consideration here is not the seniority of the executives but the pension funds involved. By definition, these people are likely to have the highest salaries and the highest pension contributions, making Sipp a viable option. Those with more modest pension funds and limited access to advice receive better value from a straightforward pension arrangement, which is not a “poorer” offering for them. Buchanan: Despite some assertions to the contrary, Sipps are not a mass-market product. They will be suitable for some people, especially those with significant funds or who are planning to make substantial contributions, but will not be appropriate for the majority. So a twotier approach is inevitable although the suggestion of “better” and “poorer” is wrong. The only issue should be about what is appropriate for individuals. Bamford: I suspect that employers will always seek to operate some form of nursery scheme for some employees and a “better” arrangement for senior employees and directors. In my view, this is quite natural. Sipps may well remain attractive for those who want to exercise control and choice over the underlying investments. I do believe the NPSS will, in any event, decimate or worsen the lower-tier GPP and group stakeholder schemes. The Government White Paper has proposed scrapping contracted-out rebates. What impact would such a move have on the value of opted-out occupational and personal pensions? Naismith: Contracting out has provided a flexible pension for many people and has been a helpful starting point to encourage them to make additional contributions. However, the rebate levels in recent years have meant that contracting out has become financially unattractive and opted-out business has become much less significant for most providers and advisers. Ideally, we would prefer contracting out to continue, with more attractive rebates to encourage increased private provision but its abolition is much less of an issue now than it would have been five or 10 years ago. Buchanan: The obvious impact is that contributions to such plans will be reduced and so the ultimate fund will be smaller. At the macro level, unless individuals increase their own contributions, the balance between state and private provision will tilt still further towards the state, despite the Government’s stated intention to the contrary. This is an inevitable consequence of the proposed simplification. Bamford: The scrapping of contracting out will make the provision of pension advice easier to deliver in the money-purchase sector. In the defined-benefit sector, it will make schemes more expensive to run in the sense that contributions will be higher or benefits will be reduced. Where there will be problems will be in the public sector, where the Government will find that its spineless approach to dealing with public sector pension demands will bite it hard. The Government’s plans also include for a big reduction of the number of people affected by means-testing but these figures have been queried by a number of people including the Pensions Policy Institute. How reliable are the Government’s figures? Naismith: We think the Government’s estimates are optimistic but are waiting for publication of the assumptions made to enable a fuller assessment of how realistic they are. Even on the Government’s estimates, means-testing will only reduce significantly over the very long term so it is an issue that will be with us for the foreseeable future. We have to recognise, however, that the actions being proposed should prevent means-testing from spiralling out of control, which was previously a real danger. Buchanan: The answer is that no one knows, since the Department for Work and Pensions has still to open up its calculations to public scrutiny. We share the PPI’s suspicions that means-testing will continue to be a much bigger factor in the future than the White Paper implies, which highlights one of the most serious dangers in the Government’s pension reform programme. Bamford: The Government figures are as trustworthy as the statement: “They have weapons of mass destruction and can deploy them in 45 minutes.” Sadly, there is little confidence that the Government knows what it is doing in the pension arena. We need to withdraw means-testing and replace it with a satisfactory basic state pension for all. That would enable people to save on top with confidence, something they are unable to do now. Any changes to the system, particularly the introduction of personal accounts, needs to be done properly but is it possible to provide any sort of blanket advice while any elements of meanstesting remain? Naismith: Means-testing does not rule out generic guidance but it certainly makes it more difficult. It is important that a realistic assessment is made of which groups of personal accountholders could lose out through means-testing and by how much. In general, it is likely to be an issue mainly for those approaching retirement although younger people with very low earnings could also be affected. There must be particular concerns over those who will lose means-tested benefits pound for pound rather than 40p in the pound, which is normal with pension credit. Buchanan: Any genuine blanket advice will need to be subject to some heavy caveats. What might be worth considering is to provide generic advice to certain groups of people. For example, someone with savings over X,000 will probably not be subject to means-testing, always assuming the current rules continue to apply, so could plan to make further savings without the need to consider means-testing issues. But the figure for X is still subject to the assumptions made and the type of savings the individual has. A wide range of figures have been quoted by different people. It is a hugely complex area. Bamford: There is a risk of a savings vacuum while we wait for details of personal accounts. The advisory sector has taken too many hits in the past for any serious firms to get involved in individual savings through personal or stakeholder pensions while the design and implementation of this new system takes place. Best advice may well be to stick savings in an Isa until details are known. Was the Government right to delay the introduction of age discrimination legislation for pensions? What issues still need to be addressed? Naismith: Delaying implementation was a major move by the Government and would not have been made unless there were serious issues to be addressed. The most significant for advisers may be the uncertainty over what is and is not allowed for age-based tiered contribu-tions. We do not believe the regulations were designed to outlaw most existing arr-angements where contrib-ution levels increase with age but they are too vague to give any certainty on this. We hope that the delay will allow the DWP to give clarity on this issue. Buchanan: There was a pressing need for clarity about some of the planned regulations, most notably in relation to the proposed exemptions. The trade-off for the greater clarity is less time, probably around six weeks,for advisers, employ-ers and trustees to decide on and implement the relevant changes by December 1. Bamford: It may well be that, only six months after pension simplification, the age discrimination rules on pension provision were just too the straw that broke the camel’s back. It does seem possible that the deferment of the introduction of this legislation was a sensible move. The Government needs to demonstrate leadership and take some fundamental decisions about the future of state pension benefits. What is taking place now is tinkering around at the edges.