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Shattered dreams

Suddenly pensions are big news. Issues that the industry have been highlighting for some time are now hitting the general consciousness.

The chorus of criticism coming from so many quarters is managing to do what the Government&#39s sheepdog failed to do – make the general public realise their assumptions about retirement income need to be changed.

The thrust of New Labour&#39s pension policy has been to throw the burden of responsibility for retirement on to the individual. This has, however, an advice aspect.

Torquil Clark head of research Tom McPhail says: “Having before assumed that they could drift towards the magic carriage clock moment in the future, they suddenly find they have to inform themselves about retirement planning.”

The two secure rocks of retirement income – the state pension and final-salary occupational schemes – which were part of the 20th Century landscape, are being severely and quickly eroded. Stakeholder pensions were the great idea to fill the gap but take-up has so far been poor.

According to Frank Field, the independent-minded Labour MP who was briefly welfare reform minister, this country is at a “pensions precipice”. He says if the Government does nothing, the sector will be transformed by the end of the year. He has come up with radical proposals, such as providing advance corporation tax incentives to encourage employers to continue with their existing defined-benefit schemes.

Criticism is coming from all over the political spectrum. Conservative Shadow Secretary for Work and Pensions David Willetts says: “Ministers continue to claim that occupational pensions are the great welfare success of the recent past but the closure of final-salary schemes has now reached a tipping point.

“The £5bn a year tax hit and the excessive burden of regulation have made it increasingly hard for companies to offer their employees generous pensions. It could well be that we have now reached the stage where expenditure by occupational funds exceeds their income.”

In defence, Secretary of State for Work and Pensions Alistair Darling says the Sandler and Pickering reviews are there to look at these problems. But Willetts says to wait for Pickering, whose pension simplification review is widely tipped to go beyond its remit, could be too late. Many of the final-salary schemes could have closed by then, he says.

The TUC and the trade unions are turning up the heat. Amicus general secretary Roger Lyons has written to Prime Minister Tony Blair and toured the television studios, calling on the Government to stop the accelerating trend away from final-salary pensions, which he described as the “great pension robbery”.

The union is looking for pension rights to be protected in contracts of employment and for consultation to take place before employers decide to change their pension schemes.

Employer organisations are also unhappy. Both the CBI and the Institute of Directors are expressing concern although neither wants to express a preference for final-salary over money-purchase schemes, stressing that the suitability of one over the other depends on the specifics of a company and its workforce.

Both feel that the effects of the various interventions of the Government into the pension arena are now becoming apparent.

Institute of Directors dep-uty head of policy Richard Baron says: “Removing ACT credits was a big hit and now that the stockmarket is stopping its inexorable rise, the effects are coming through. The Government should do more to encourage saving.”

CBI senior policy adviser Mark Thomas says:”Our basic position is that the Government has been tilting the regulatory playing field to make employers move away from final-salary schemes, even if the employers would rather that was not the case.”

However, he finds the proposal put forward by Field to offer incentives to final-salary pension schemes by reconsidering the dividend tax credit position as unjustified and somewhat strange.

The debate on compulsion, thinks Thomas, has arisen as a direct result of the disincentives that the Government has placed in the way of saving. Rather than compel people to make contributions into private schemes, the Govern-ment should employ a carrot approach of making saving for retirement more attractive.

Unlike the CBI, which is opposed to compulsory contributions from employer or employee, the IoD can see a case for forcing staff into making payments into pension schemes.

Charities are also submitting the Government&#39s strategy to careful scrutiny. Age Concern income policy off-icer Sally West highlights a different concern, which is how can people know how much to save? The charity points out the debate has been too focused on the means rather than objectives.

The judge of any pension scheme is what it provides at the end of the day, whether it will provide a reasonable retirement income.

However fine a product is in terms of charges and simplicity, the question is how to judge its success in terms of providing a decent standard of living. No research has been carried out into what this will be. Age Concern is pressing the Government to carry out a thorough assessment of what pensioner needs will be, in similar fashion to the research carried out into the needs of children as part of the strategy to eliminate childhood poverty.

McPhail says the current climate affects IFAs in two ways. Not only individuals but employers are beating a path to IFAs, he says. As a result of the current environment, he says his firm and IFAs generally are dealing with employers which want to install a direct-contribution scheme alongside what they already have in place.

Individuals will need help from advisers on areas such as investment risk and strategies and funding levels – issues that many people will be addressing for the first time.

McPhail sees no reason to be apologetic about the fact that they will have to factor in the cost of advice as well. “It is up to us to help clients, and there are undoubted opportunities for IFAs,” he says.

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