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Pensions Bill confirms abolition of contracting out for DC schemes

Providers have expressed dismay at the Government’s decision to press ahead with the abolition of contracting out for defined contribution pensions schemes.

The Government’s Pensions Bill, described as a “landmark settlement for future generations” by Secretary of State for Work and Pensions John Hutton, contained no real surprises, raising the retirement age to 68 from 2024 and reducing the number of qualifying years needed to receive a full basic state pension for both men and women. Hutton said this move, and additional plans to introduce weekly credits to reward caring in the same way as working would ensure almost half a million more women over the state pension age in 2025 will be entitled to a full basic state pension.

The Bill also confirmed plans to make the state pension more generous by linking the Basic State Pension to earnings.

It also allows for the creation of a Delivery Authority to bring on board the expertise needed to design a successful personal accounts system which would provide people with a low-cost simple way to save. Detailed proposals for personal accounts will be published in a White Paper in December.

While these moves received widespread support, the confirmation that DC schemes will ve abolished and the Government’s decision to stop the ability to convert rights to a Guaranteed Minimum Pension into ordinary pension rights have not gone down well with some providers.

Standard Life says it supports the main changes contained in this Bill which it hopes will help ensure that women will no longer be propping up the retirement poverty ladder.

But it warns the Bill “is not a complete panacea for all pension ails” and criticises the decsision to ban contracting out for DC schemes.

Standard Life marketing technical manager Andy Tully says:

“One disappointing measure is the scrapping of contracting out for defined contribution schemes. This moves around £3bn a year from private pensions to unfunded state pensions – exactly the opposite of what we should be doing.

“It is critical that the Government takes other measures to improve overall pensions coverage. Unfortunately this Bill doesn’t move us forward in the key areas of means-testing and levelling down, and we remain concerned that levelling down of existing pension provision is a serious threat.”

Aegon also says it is disappointed the Government intends to push ahead with plans to abolish contracting out for defined contribution schemes from 2012 and to downgrade the State Second Pension to a flat rate scheme. It argues these measures will make S2P highly redistributive and go against the aims of the Pensions Commission and the government to encourage earnings-related privately funded pensions.

ABI director general Stephen Haddrill has branded the reforms a step in the right direction but raised concerns over the Pension Bill’s proposals, or lack of them for the Delivery Authority which will set up NPSS Personal Accounts.

“On the Delivery Authority the Bill raises more questions than it answers. The imminent pensions White Paper should set out specific details of how the Delivery Authority will operate beyond the first 18 months mapped out in the Bill. We will be looking for guarantees that the Authority is genuinely independent and will be led by people who have real, practical expertise in the pensions field. It should also set out the Authority’s precise remit and objectives.”

HSBC Head of Pensions and Retirement income Ian Martin says:

“We believe that in the future there will be, quite rightly, no such thing as ‘retirement’ – just times when people decide they no longer wish to continue working. Of course, the key to individuals being free and empowered to make these choices will depend upon their willingness to save for their future now.”

“People must think clearly and carefully about what to do with each pound they earn – spend it today or save it for tomorrow. If they spend it today then they will have a fairly miserable retirement to look forward to. As a rule people should save 15p of every £1 they earn.”


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