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Making pensions add up

The UK is hurtling further into a pension crisis.

The objective of reducing state retirement funding appears impossible with the Government&#39s policies.

The NAPF recently said three out of every four companies offering final-salary pension schemes are considering withdrawing them because of increased funding requirements due to the reduction in tax relief and new accounting standard FRS17.

This requires any pension funding deficit to be shown on the sponsoring company&#39s balance sheet. One reason why FRS17 has had such a big impact is because of the sharp fall in equities. It has been estimated that more than half of FTSE100 companies could cut dividends this year partly as

a result of FRS17.

FRS17 is an ill-conceived and ill-timed measure. It cannot be right that the introduction of a new standard should jeopardise the survival of companies.

Most worrying is that when companies switch from final-salary schemes to money-purchase, the employer contri- bution typically falls from 15 per cent of an employee&#39s salary to 6 per cent or less. The outlook for money-purchase schemes is not particularly good. Employers and employees should be looking at an increase in the funding rate, not a decrease.

As life expectancy continues to rise, so annuity rates will continue to decrease. This will require a further rise in funding to achieve the same income.

The dilemma for the Government is that its target market for stakeholder should not invest in stakeholder as they cannot save enough to improve on the minimum income guarantee.

Lower-paid employees will rely ever more heavily on the state second pension, due to be introduced next year, which will in time be amalgamated with the basic pension to provide a higher, but means-tested, income in retirement.

State funding of pensions

will soar, requiring substantial increases in taxation. To alleviate this, the Government should introduce compulsory contributions to cheap, simple pension plans for anyone who has not made adequate pension provision voluntarily.

The tax relief on income into company pension schemes should be reintroduced. Its removal in 1997 resulted in a seismic shock to pension funds as actuaries&#39 calculations were blown away overnight.

Some commentators, such as the CBI&#39s Digby Jones, have proposed introducing new tax credits. However, these will simply add another layer of new regulation and legislation for an already overburdened industry. Reintroducing dividend tax credit repayments would be well understood and ease some of the pressure.

The FRS17 accounting requirement should be reversed. A new standard must reflect the long-term nature of a pension scheme and its investments. To require companies to become involved in snapshot accounting on the value of the assets and liabilities of a pension fund is totally at odds with the nature of the investment.

This brings unnecessary volatility into the accounts of the company and major implications for profitability and the ability to pay dividends.

Investors should be allowed to draw a pension income from pension investments throughout their lifetime without the ridiculous situation of having to purchase an annuity by 75.

The level of annuity rates is largely down to luck, depending on when people happen to retire. This does not inspire investor confidence. The annuity regime should be improved, with rules that allow any of the funds not returned as income when an annuity is purchased to be returned to beneficiaries at death.

Pension legislation should be simplified. We have an indescribable amount of pension legislation, some of which is contradictory and makes what should be a relatively simple exercise almost impossibly complicated.

Early indications from Alan Pickering suggest his review will call for a simpler regulatory framework. This can only be good news for the industry.

The clear message is that investors will need to become used to the idea of extending their working life.

Increasing life expectancy has led to a retirement age of 70 being mooted. Investors cannot rely solely on their pension. They should be looking at the range of tax-efficient investment opportunities available, such as Isas.

IFAs should nevertheless emphasise to their clients that pensions will continue to play

a vital role. The industry is besieged with problems but, compared with many other countries, the UK faces a smaller shortfall.

Investors should be encouraged to check their contribution levels and consider improving pension arrange-ments by consolidating existing policies, for example.

IFAs should also be encouraging clients to voice their concerns to their MPs about Britain&#39s pension system.

The Government does not seem to appreciate the problems it is causing and the potential crisis for the future. It has made a series of blunders and it will take a lot of reform for trust to be rebuilt.

I look forward to the outcome of the pension review this summer that promises to contain a number of radical proposals. However, until any reforms can be enacted we are faced with a pension system that is moving closer to the brink of disaster.

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