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Pension detriment

Government gives employers an incentive to cut their pension liabilities

The findings of the Association of British Insurers’ State of the Nation’s Savings survey are not surprising but make depressing reading. Those members of the public who are aware of the proposed pension reforms seem to be increasingly sceptical that the reforms will ever be implemented and believe that, if they were, they would not make much difference anyway. They could be right.

“Millions are still not saving enough for their retirement, most are not aware of the Government’s plans to reform the pensions system and many don’t believe the new personal accounts will ever be implemented,” says the ABI.

The survey found that 44 per cent of people believe it is unlikely that the Government’s plans to introduce a new system of personal accounts will occur. Only 30 per cent believe they will.

This is hardly surprising given that experts have pointed out that if the reforms are implemented, those on average earnings and below will be made to pay for pension benefits they currently get for free, but means-tested, state social security benefits. This is not going to be a vote winner.

The ABI also published research by accountant Deloitte showing the damage that the proposed pension reforms are likely to inflict on occupational pension provision. One in four employers would consider levelling down their pension contributions when NPSS personal accounts are introduced, reducing pension provision for some 2.4 million employees. This only confirms what other surveys have shown but it is still depressing.

The majority of final-salary linked schemes are closed to new members and the number of employees covered by defined-contribution schemes now exceeds those looking forward to pension benefits linked to final salary.

The ABI figures show that 4.7 million people – 17 per cent – are saving in a work-based, defined-contribution pension, compared with three million – 11 per cent – in private sector, final salary schemes. With a workforce of about 26 million, this leaves the majority with no occupational pension savings at all.

The latest unintended consequence of Government’s inept attempts at pension reform have produced yet another incentive for employers to cut their pension liabilities. Benefits consultant Mercer has pointed out that the tax treatment of lump-sum pension buy-offs offered by some employers to persuade employees to leave the pension scheme, are encouraging companies to cut their commitments to occupational pensions.

According to Mercer, tax inspectors are allowing these lump sums to be made tax-free for individuals who are no longer employed by the firm or building up future benefits in the pension scheme.

This creates a positive incentive for schemes to stop pension accrual, so that their employees are eligible for tax-free payments. It could also encourage employees taking a short-term view to ask their employer to buy them out of the pension scheme, without any real idea of whether the lump sum they receive is adequate compensation for the pension benefits they have given up.

This would produce even more unintended consequences. According to Mercer, the Treasury may lose up to £2bn in pension tax receipts, while the Government will face increased means-tested benefit exposure in the long term, if individuals spend their lump sum payment rather than using it to supplement their retirement income. This is yet another area of pension reform which Government simply hasn’t understood or thought through.

As an incredulous Tim Keogh of Mercer puts it: “We’re staggered that the Revenue is authorising tax-free payments and therefore creating an incentive for pension schemes to close. Is this really what the Government wants?”

Probably not, but like much in the proposed pension reforms, it is creating a situation where more people will be worse off than ever. The Government’s biggest, single mistake was in refusing to let Turner do the sensible thing and review State provision of pensions and means-tested benefits at the same time as coming up with proposals for private pension reform.

Until the Government goes back and looks at the situation in its entirety, including taxation, means-tested benefits, state and private pension provision – not to mention reform of public sector pensions – there is little hope of any improvement and a real possibility of huge pension detriment for millions.Money Marketing

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Five of the country’s top mortgage brokers have clubbed together to help them secure better deals from lenders.

The mortgage market has seen lenders old and new driving the initiative for months while everyone is looking to use the new regulations to steal a march.

But this alliance of Savills, Hamptons, Cobalt Capital, Chase de Vere and Alexander Hall is of a different order. This could represent one of the biggest shifts in the balance of power in the mortgage market for almost a decade. Those brokers not in this club should sit up and take notice and maybe consider similar alliances so that they can access cheaper deals as well.

The Government-funded National Consumer Council says consumers need to take more responsibility for financial services products.

It believes there must be some element of caveat emptor for regulation to work and to provide value for money. We couldn’t agree more. We also suggest that for any of the rhetoric about financial capability to have relevance to the real world, then people must accept some element of risk.

The insurance industry should be wary of the law of unintended consequences.

The Law Commission has recommended introducing a three-year non-contestability period on insurance products. This would defuse one of the areas of greatest conflict between customers who believe insurance should pay out regardless of the small print and insurers which have to safeguard profits.

This system operates in the US but there are serious downsides. In the States, it has effectively killed off critical-illness insurance, there is stricter underwriting and premiums have risen.

Some in the UK believe it would widen rather than close the protection gap.

Damage to reputation over unpaid claims may frustrate the industry but it must be careful that any solution to the problem is not worse than the problem itself. We suggest that the ABI and brokers proceed with extreme caution.


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