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Stewart Ritchie on pensions

Most financial advisers are probably fed up reading about how the new pension tax regime will affect people above the lifetime allowance because the vast majority of their clients will not come anywhere near to 1.5m of pension value over their working lifetime.

But anyone in an occupational pension scheme could be affected by decisions made for and by those people in the scheme who could reach the lifetime allowance.

At its simplest, if big potters – I am told “fat cats” is pejorative so try not to use that term – reduce their personal interest in a scheme, they are less interested in that scheme’s well-being. The big potters will often include people such as the managing director and finance director, who will be key decision-makers for the pension scheme.

So if a member becomes aware of the big potters leaving the scheme or ceasing future accrual, it might be worthwhile asking about the employer’s future intentions for the scheme as a whole.

A more particular concern might also arise for precisely the opposite reason. Consider one of the big potter solutions which is currently going round the market. One way to avoid exceeding the lifetime allowance is to provide all the benefit above this value through an unfunded unapproved retirement benefit scheme (Uurbs).

The beauty of Uurbs is that there is no tax charge on the member until the benefit is paid. Equally, there is no tax relief for the employer until then either because there are no pre-funding contributions. An Uurbs is not a registered scheme so it does not count for lifetime allowance purposes.

But the weakness of an Uurbs is the lack of security for the member. Basically, all it is is a promise to pay benefits at a future date. So if the employer goes bust, the benefit may never be paid and the risk of this may extend for the remaining lifetime of the Uurbs member – perhaps 40 or 50 years.

The proposition going round the market is that you overcome the Uurbs security problem by creating a contingent liability for these benefits within the funded staff pension scheme. If the Uurbs pays out, the staff scheme does not. But if the Uurbs fails to pay the promised benefits, the staff scheme will make good the difference.

Look at this from the viewpoint of an ordinary member of the staff pension scheme. The very time at which the staff scheme’s resources would be depleted to pay the contingent benefits to the big potters would be when the employer had just gone bust.

Unless the staff scheme was very well fun-ded, the security of the benefits for ordinary members would be reduced at the worst possible time. I cannot see the members or the trustees being over the moon about that and it will be fascinating to see what the new Pensions Regulator makes of it.

Clearly, it would be possible to adopt a stronger funding strategy for the staff scheme to take account of the contingent liability for the big potters but the only way that would avoid the risk to ordinary members would be for the full cost (probably as single-premium non-profit deferred annuities) of the contingent benefits to be maintained as a separate sub-fund.

This would clearly not be a cheap solution for the employer but perhaps since it is for the big potters, it would be an acceptable cost. This might be easier to sell to the shareholders in a small family-controlled business than in a major publicly-quoted company, where high standards of corporate governance are obligatory.

It would be interesting to see how such a sub-fund could be ringfenced away from the normal priority clause on winding-up of the staff scheme and what the resulting publicity would be. I can see the headlines now – Fat cats scoop the pension pool at the expense of the other members. The fact that there had been additional funding for this might get lost in the telling.

It is important that big potters get a fair deal in the transition to the new pension tax simplification regime but it should be a fundamental principle that this must not be achieved by increasing the risk to people who have less to start with.

Stewart Ritchie is director (pensions development at Scottish Equitable

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