View more on these topicsAnalysis
Pension practitioners will be familiar with what the taskforce sees as problems with the current system, such as the decline in defined-benefit schemes, and with many of its recommendations, including the need for higher contributions to defined-contribution schemes and improved communication from providers and employers to encourage interest by prospective members. The report’s content on future problems for annuity providers as a result of increased demand, improved longevity, greater capital requirements and the lack of suitable long-dated bonds was covered at length in the Turner report earlier in 2004. One of the taskforce’s recommendations in the area of annuities is that the Government should consider encouraging “alternative products for the early years of retirement”. The report says one possibility could be a “new low-cost, off-the-shelf drawdown-type product that would provide a regular income stream with a less comprehensive guarantee than conventional annuities”. This looks like the result of a session of blue-sky thinking which did not progress beyond the first round. As with other recommendations in the report, there appears to be no recognition of the implications of the impact of such a product. There is no acknowledgement that drawdown products in their current form involve increased risks and an “off-the-shelf drawdown-type product” in an area already fraught with regulatory problems does not look feasible. Other calls on employers to maintain an element of DB provision, for example, through career-average schemes or DB/DC hybrid schemes, look like shutting the stable door after the horse has bolted. Many employers have already made the decision to end their DB schemes or close them to new entrants and set up new DC schemes. What employers are going to go back on those decisions now? The report contains a good practice guide including case histories of the approaches of different employers in promoting pensions. This could be helpful to employers looking to install a new scheme, reinvigorate an existing one or simply benchmark their practice against others. However, the report’s interest in replicating US pension practice in relation to loans is worrying. It is true that allowing members to take loans from their 401(k) plans in limited circumstances is a factor in encouraging people to join plans in the US. However, with personal debt in the UK soaring to unprecedented levels, it would be perverse to allow people to borrow from yet another source – their pension. The report states that the majority of people use 401(k) loan facilities for home purchase or bill consolidation, the latter suggesting that the borrower is merely switching short-term loans for a longer-term pension loan. The taskforce “urges the Government to consider a similar loan facility within the UK but recognises the need for tight regulations to avoid leakage”. So not only is the loan facility of doubtful value in a broad economic sense but it would be dependent on a panoply of regulations which inevitably would increase bureaucracy – and costs – on employers, scheme trustees and pension providers. The report also praises the US anti-discrimination regulations which require employer pension contributions to go equally to rank and file employees as well as senior employees. The report suggests that the Government should consider this approach “as a means of increasing pension provision in the UK and, while recognising that the level of bureaucracy associated with these rules in the US is a real concern, it recommends that the Government would need to ensure that this was avoided in any UK version”. Why not just say that as US employers are critical of the red tape involved in this anti-discrimination law, it should not even see the light of day in the UK? UK employers, especially small businesses, complain about overregulation in many areas of commerce including pensions. Adding yet more regulation would be a retrograde step, especially at a time when pension simplification is about to take off.