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Simplicity Brings Opportunity

The prospects for pension advisers are beginning to look more positive, especially for those involved in the design of occupational schemes and executive remuneration. That might seem an odd statement considering the current pensions scene – poor investment returns, employers abandoning defined-benefit schemes and the disappointing take-up of stakeholder pensions.

The recent actions by some employers to reorganise their pension schemes, for example, switching from a defined-benefit to a defined-contribution structure or maintaining the defined-benefit scheme only for existing members have been greeted with alarm by many. However, those employers will have considered these moves imperative in view of the prevailing background of pension fund deficits, increasing longevity and higher costs in running their schemes. Having reorganised their pension arrangements, these employers may have thought that they could forget about pensions for a few years and concentrate on running their businesses.

The Inland Revenue&#39s proposals on simplification change all that. The introduction of a lifetime limit on tax-favoured retirement and death benefits of £1.4m (as announced in the first consultation document in December 2002) and the replacing of years of pensions law and practice with a new regime will cause a huge upheaval in pension schemes and in remuneration practices. That is why the prospects are good for pension advisers.

Advisers should be looking forward with anticipation to the next stage of the Inland Revenue&#39s consultation on pensions simplification in the autumn. Hopefully, it will give clear answers to the questions that practitioners have raised over the first consultation document, for example, the details of the transitional arrangements and the future of unapproved schemes. Advisers will then be in a position to gear up for when the changes become effective on April 6, 2005.

If the final proposals are in line with those already published, employers will not have long to devise new ways of compensating senior staff. The lifetime limit is one of the most far-reaching changes to affect executive remuneration in many years – more significant than the introduction of the earnings&#39 cap in 1989. The cash limit of £1.4m, in 2002 terms, will be sufficient to buy a pension of around £60,000 a year to £70,000 a year depending on the type and level of ancillary benefits like dependants&#39 pensions and escalation.

New recruits who are likely to be high-earners in the future will join schemes that will provide a pension that reduces as a percentage of their increasing earnings if the lifetime limit is linked to increases in prices as appears likely. Although senior staff, who are already members of pension schemes, will have favourable transitional arrangements those arrangements will not apply to future service accrual of benefits. Both these groups will be looking for ways to top up the pension provided by their employers.

Other ways of paying staff such as share incentive schemes are also undergoing scrutiny by shareholders and in future the tax advantages of share options are being restricted. So employers, particularly HR departments, will be looking for advice on how to provide new reward packages for staff, especially high-earners. Currently, a separate top-up pension scheme for senior staff has been an option but in future employers are more likely to be pruning away supplementary schemes rather than setting them up. They will also have the opportunity to ditch AVC schemes and simplify administration.

Highly paid staff will not want to be saddled with tax bills if their pension fund should exceed the lifetime limit. In future, they will have to monitor closely the performance of their fund and the increasing value of it as they accrue more benefits. Investment allocation will become very important for those close to the lifetime limit. Whereas currently scheme members naturally want to see their pension funds increasing every year, in future highly paid staff will need to avoid large increases which might trigger a personal tax charge.

All employers will have to review their schemes in the light of the Inland Revenue changes, including those which have already made big changes to their schemes in recent years. The decisions they take will need careful consideration based on expert advice from experienced financial advisers.

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