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Stormy weather

Scottish Life head of pensions strategy Steve Bee’s warning that we are entering into a “perfect pension storm” should not be taken lightly. He believes that A-Day only accounts for a small part of the upheaval that is yet to be felt by the pension industry, with future changes set to have a much bigger impact which pose a thread and an opportunity to IFAs.

But this is not the first time that Bee has used the words “perfect storm”. In May 2003, he said: “Someone suggested that so many things were affecting UK pensions at the moment that it was getting difficult to predict what the overall affect was going to be and it was then that it hit me. We could be in line for the perfect pension storm.”

His comments came just before the then Work and Pensions Secretary Andrew Smith stopped solvent employers walking away from their pension liabilities. Bee says: “In the process, he upped the odds on the bigger storm that was already brewing.”

In 2003, Bee was worried about stakeholder pensions and the closure of defined-benefit occupational pension schemes. Now he is more concerned about the age discrimination rules and the Government’s Pensions White Paper.

He says: “There is going to be a massive shake-up of the pension industry, much bigger than what we saw at A-Day. The White Paper and occupational pension provision will be confusing and dangerous. But advice incentives will be much more in demand than ever before, which is great news for IFAs.”

The age discrimination legislation, due for implementation in October, has already provoked calls for the Government to defer the new rules until they are better understood.

Much of the concern centres around whether firms which give or gave higher contributions to older workers can prove this was to produce a more equal outcome in terms of pension at retirement rather than a discriminatory move.

Consultancy Mercer is warning that many schemes could face significant costs as a result of the legislation and could face retrospective claims for years to come.

Bee says: “The problem is that no one knows how this will pan out, so our understanding will largely be determined in the courts.”

Principal Deborah Cooper says a further layer of uncertainty has emerged as the guidance is being better understood. She says: “Previously, the Government was suggesting that the majority of employer- based pensions would be unaffected by the new age discrimination legislation. Now that the guidance is out, this is perhaps not the case. This is why we are urging a delay in the regulations so that we can properly understand the implications.”

Cooper says Mercer’s latest research has shown that four out of 10 occupational schemes pay contributions based on factors such as age and length of service. As a result of the regulations, more companies may be discouraged from offer-ing defined-contribution occupational schemes.

Bee says: “This could be a fantastic opportunity for financial advisers. There is a big risk that companies will be close to distributing unsuitable pensions. The advice incentive will be much greater now than it ever was.”

Aegon head of industry development Peter Williams says: “I think that Steve Bee makes some valid points although the reality is a little more subtle than Steve may have painted.”

Williams says he is positive about many of the changes brought about by A-Day and what little impact was felt by the average employee contributing to a scheme but is wary of the likely effect of age discrimination rules, too.

He says: “Most members of group and occupational schemes have seen little change because of A-Day. If you are lucky enough to be in defined-benefit schemes, you will still be looking at benefits on the old pension formula.

“However, this will change with age discrimination. Schemes and employers will have to take action. In particular, death in service benefits will cause some issues. Although demanding to stay in the pension scheme for future accrual will have limited impact, an employee demanding the continuation of death in service could have serious cost implications.”

The impact of the White Paper has already been discussed at length and the possible impact on the industry is, just like the age discrimination regulations, open to interpretation.

Winterthur Life pensions strategy manager Mike Morrison says: “Add in the uncertainty regarding alternatively secured pensions, the recent select committee calling for the removal of tax-free cash and higher-rate tax relief. The White Paper is the least of our worries but we need to get the NPSS right.”

Suffolk Life director of sales and marketing John Moret says calls from the work and pensions select committee for a review of pension tax relief bands to see if resources could be better spent on state pension benefits is very dangerous.

The report states: “Pension tax relief is costly, poorly focused and not well understood.” It also says the Revenue estimates that the total cost of pension tax relief is around 12.3bn a year.

Moret says: “The question is, where are all these changes leading? Normally, change creates opportunity but this could be comp- letely disastrous. It could be the end of pension advice. It could be the end of pensions.”

The industry is divided about whether the changes mean that a real storm is brewing or if it is more of a storm in a tea cup.

Informed Choice managing director Nick Bamford thinks that the uncertainty is borne out of an era of Government by consultation and continual reform of pensions with an absence of key leadership. He says: “I bet you that the pensions minister will change within the next 12 months.”

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