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Praise for Pickering

Many of the headlines on Alan Pickering&#39s report, A Simpler Way to Better Pensions, have concentrated on one aspect of his recommendations – the proposed option for employers to provide a pension scheme without the need to include dependants&#39 benefits or increase pensions in payment.

Employers are switching away from defined-benefit schemes, where they take the investment risk, to defined-contribution schemes, where the risk is shared with members. Pickering is saying that, rather than switch to defined contribution, some employers could be encouraged to maintain defined-benefit schemes if the liability were not so great.

One way of lessening the burden on the employer would be to allow them to drop limited price indexation and dependants&#39 pensions but maintain a defined benefit at retirement for the member. Surely that would be preferable to the member losing the defined-benefit link altogether if the employer switched to a defined-contribution scheme?

This option is not available to employers currently and, even if it is accepted by the Government and implemented, it will be too late to save the switches to defined-contribution schemes that have taken place in the last few months.

The headlines and the comments from trade union leaders have been critical on this aspect of the report and do not do justice to its other far-reaching recommendations. Perhaps too much was expected of it. As much of the complexity facing pension managers, advisers and potential consumers relates to tax matters, we will have to wait for the Inland Revenue&#39s review team to announce its recommendations later in the year.

Nevertheless, there is plenty to be going on with, much of which lies at the door of the Department for Work & Pensions and its regulations on contracting out. The Pickering report contains a damning summary of the complexities surrounding occupational schemes, particularly those contracted out of the state second pension, for example, the different treatment of rights relating to limited price indexation, guaranteed minimum pensions and protected rights under defined-benefit and defined-contribution schemes. These complexities involve parallel record-keeping in respect of the GMP and non-GMP benefits and protected rights and non-protected rights benefits as they build up under schemes. Transfers between schemes also carry the need for separate record-keeping.

We will have to wait for a green paper later this year to see how far the DWP is prepared to go in responding to Pickering. A new Pensions Act to consolidate all previous pension regulations, a new pension regulator, simpler contracting out and revised disclosure of information to members all need much thought although Pickering has done a lot of the work already.

Pickering&#39s recommendation on the introduction of immediate vesting of pension rights under all types of scheme is a good one. This would allow members to acquire vested rights to benefits immediately once they have become a member, rather than having to wait for two years&#39 membership to elapse. This would go hand in hand with scheme trustees being permitted to transfer the benefits of early leavers to safe-harbour products such as stakeholder plans rather than having to maintain small pots within the scheme.

At the same time, legislation could be introduced allowing employers to make membership compulsory. This would be a reversion to the practice that applied before April 1988. The lifting of that requirement enabled people to decline the offer of membership, with the result that some took out personal pensions instead while some did nothing and enjoyed an increase in take-home pay.

The issue of compulsion makes the headlines with increasing regularity and the proponents argue that employers and/or members should be forced to contribute to pension schemes. Yet we find that a significant number of people do not even join schemes when given the opportunity.

The 2000 General Household Survey showed that around 16 per cent of full-time employees who have access to an employer&#39s scheme decline to join. Compulsory membership – if desired by an employer – is an option that could be reintroduced soon. There is no need to wait for the green paper and, probably, another round of consultation with the industry.

Pickering has made many excellent recommendations. We have to hope the forthcoming green paper and the Inland Revenue&#39s review will take up the simplification challenge.

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