Memorandum submitted by the Industry-wide
Pension Schemes Group (PEN 25)
SUMMARY
1.1 The experience of The Netherlands demonstrates
that industry-wide schemes have an important role to play in extending
pension provision to those who would otherwise have to make individual
(and therefore more costly) provision for pensions. This includes
some of the lower paid.
1.2 As industry-wide schemes are group schemes
such arrangements can offer valuable life assurance benefits in
addition to retirement benefits.
1.3 There are artificial constraints on
such schemes which deter the establishment of the arrangements
in the first place, and which add unnecessary complexity and cost
to the operation of such schemes where they are established.
1.4 We support any initiative that seeks
to make life easier for existing industry-wide arrangements, and
to encourage new arrangements to be established.
1.5 We fully support the Sandler and Pickering
reports as helpful routes forward to make life for all pension
arrangements more straightforward, thereby encouraging increased
pension provision by all.
INTRODUCTION
2.1 There is a perceived crisis in UK pension
provision. However, perceptions can be as influential as hard
fact. The perception of crisis appears to stem from a combination
of elements. The move from defined benefit provision to defined
contribution provision is widely seen as detrimental to pension
provision. Recent talk about defined benefit pension funds being
in deficit is fuelling these concerns. Finally, a few high profile
pension cases where members have—entirely legally—lost
most of their pension savings have highlighted previously mis-understood
(or under-estimated) risks.
2.2 It is the contention of the Group that
there is no actual crisis—but that a number of hard lessons
are being learned in a short space of time. The severity of these
lessons is enhanced by the short-term approach to pension funding
that is taken by many—including the accountancy profession
(FRS17) and legislation (the Minimum Funding Requirement)—which
ignores the fact that pensions are, by their very nature, long-term.
Someone joining a defined benefit pension scheme today at 18,
and working for two or three years, creates a liability that may
well exist some 80 or 90 years hence.
2.3 The most important lesson is how expensive
pension provision actually is. The two fundamental differences
between a defined benefit scheme and a defined contribution scheme
are: firstly where the risks lie; and secondly the element of
cross-subsidisation. If both were funded equally across an employee's
lifetime then similar benefits should emerge at retirement.
2.4 Many defined benefit schemes are being
closed partly because of deficits revealed under FRS17, but also
because employees do not appreciate how expensive pensions are,
and the value of the commitment the employer is making. In a world
where corporate profitability is increasingly difficult to come
by, employers are questioning the commitment to expenditure which
is not valued.
2.5 One of the reason that the employer's
commitment is not valued is lack of understanding. This lack of
understanding stems from two causes:
(a) An individual's view that "retirement
is a long way off—if I ever get there" and in consequence
a failure to take an interest in pension provision until later
in life when there is comparatively little time to make adequate
provision; and
(b) The sheer choice of arrangement and the
complexities surrounding that choice.
2.6 The indifference to pension provision
displayed by many is partially encouraged by a belief that the
state pension will provide an adequate income in retirement.
2.7 The lack of understanding causes a lack
of trust. This is compounded by complexity of provision. The removal
of the option to allow employers to make membership of an occupational
pension scheme a requirement of employment has resulted in employees
having to make choices whereas prior to 1988 these choices rarely
existed.
2.8 Many modestly and low paid workers will
not contribute to private pension arrangements—whatever
the nature of those arrangements—because they cannot afford
to do so. Furthermore, if small savings are made, there is an
effective rate of tax which can amount to 80 per cent or more,
as means-tested state benefits are removed because of the existence
of small levels of savings. All pension schemes receive letters
after the annual pension increase award asking that the increase
is not applied, because the increase has resulted in a subsequent
loss of means tested benefits. In some instances pensioners are
left worse off as a result of the increase—an effective
rate of tax in excess of 100 per cent.
2.9 The complexity of the system is compounded
by layer upon layer of regulation which serves little purpose.
Huge resources are spent by the Civil Service, pension schemes
and the scheme providers on ensuring compliance with regulations—particularly
Inland Revenue regulations—with no demonstrable benefit
to anyone.
2.10 The DWP and the Inland Revenue sometimes
take views which cause conflict. For example, the Inland Revenue
have rules on statutory surplus which, in theory, can conflict
with the Minimum Funding Rate. The DWP wants to encourage private
saving so as to reduce the dependence on state benefits, yet the
Inland Revenue wants to limit benefits to protect the tax payer
from "giving up" too much by way of tax relief. From
the outside there is a lack of consultation and "joined-up
government" between the two which is unhelpful, although
there has been improvement in recent months.
ISSUES THE
INDUSTRY-WIDE
GROUP WISHES
TO HIGHLIGHT
3.1 In several parts of the world industry-wide
(or multi-employer) pension arrangements are the norm. The Netherlands
is an excellent example.
3.2 Industry-wide provision provides a number
of benefits, not least the ability for relatively small employers
to benefit from economies of scale and in consequence being able
to provide better pension provision than would otherwise be the
case.
3.3 In the UK industry-wide provision is
less common than in the Netherlands or other countries. There
are many reasons for this, but the failure to actively encourage
such schemes means that smaller employers who would otherwise
wish to take on some of the risks of pension provision cannot
afford to do. Indeed, it could be argued that obstacles are placed
in the way of such schemes which serve to restrict the potential
benefits that could be offered both to employers and members,
and in so doing these obstacles reduce the attractiveness of such
arrangements.
3.4 It could be argued that even smaller
employers can now make provision for employees by way of a contribution
to a stakeholder arrangement, and for many this will be a solution.
However, stakeholder pension schemes are individual arrangements.
In a group arrangement better terms can be achieved in respect
of charges—and that translates into better investment returns
and consequently better pensions (or cost savings for the employer).
Yet this group provision is not available to the self-employed,
and is made unnecessarily complex for smaller employers. The result
is less pension saving overall, and less provision by employers
than would otherwise be the case.
3.5 The real issue that holds back industry-wide
provision is the Inland Revenue's concern that there should be
no cross-subsidy between competing enterprises. This means that
industry-wide schemes have to keep assets and liabilities separate
for each participating employer. And this results in increasing
cost and complexity which negates, to a certain extent, the benefit
of establishing the scheme in the first place.
3.6 This is not to say that such schemes
are exempt from the increasing cost pressures that all pension
arrangements—whether defined benefit or defined contribution—face.
However, a genuinely pooled vehicle would be much more efficient
that is currently allowed.
3.7 We fully understand that the Inland
Revenue does not wish to allow abuse of the generous tax advantages
available to pension schemes. Nevertheless, the approach taken
in respect of industry-wide (or, as the Revenue refers to us,
centralised schemes for non-associated employers) appears disproportionate
given the other protections (for example, the earnings cap, and
the rules on controlling directors) that exist.
3.8 We would also urge the removal of the
artificial distinction between the employed and the self-employed.
This would open up membership of occupational arrangements (by
way of industry-wide or other schemes) on a group basis for the
self-employed who run their own businesses and who are important
to the future economic success of the UK.
3.9 Within the DWP there appears to be little
understanding of the particular issues that industry-wide schemes
face, and, as a result, our costs are unnecessarily high.
3.10 One example is the requirement to consult
with employers over the content of the Statement of Investment
Principles. We agree that in a scheme with one principal employer
it is right a proper that there should be consultation between
trustee and employer over the investment principles. However,
for industry-wide schemes such consultation process is meaningless.
Firstly we have the cost of the consultation exercise itself.
Then, even if we get a response from an employer, unless the response
reflects the view of the majority of the employers it is not possible
to take it into account—it is not appropriate for the trustee
to determine investment strategy for a scheme with over 100 participating
employers on the basis of the views of one or two of those employers.
3.11 Most, if not all, areas where consultation
is required—which make sense in the context of schemes with
a principal employer—simply cause additional work to the
benefit of no one in industry-wide schemes. Legislation is, in
the main, written with the large, single employer (or associated
employers) scheme in mind.
3.12 The group is of the view that the way
forward proposed in the Pickering Report—of Codes of Practice
managed by a New Kind of Regulator—would, even if Revenue
rules were left unchanged, be a help to the effective functioning
of our schemes, and therefore a benefit to the employers and members
who participate.
CONCLUSIONS
4.1 The experience of The Netherlands demonstrates
that industry-wide schemes have an important role to play in extending
pension provision to those who would otherwise have to make individual
(and therefore more costly) provision for pensions. This includes
some of the lower paid.
4.2 Industry-wide schemes are an effective
and efficient method of providing pension arrangements on a group
basis for those who otherwise would not be able to make provision.
4.3 There are artificial constraints on
such schemes which deter the establishment of the arrangements
in the first place, and which add unnecessary complexity and cost
to the operation of such schemes where they are established.
4.4 As industry-wide schemes are group schemes
such arrangements can offer valuable life assurance benefits in
addition to retirement benefits.
4.5 We would support any initiative that
seeks to make life easier for existing industry-wide arrangements,
and to encourage new arrangements to be established.
4.6 We fully support the Sandler and Pickering
reports as helpful routes forward to make life for all pension
arrangements more straightforward, thereby encouraging increased
pension provision by all.
Mrs Penny Green
Chairman
3 October 2002
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