Connected Research

Union policy research in the 21st century

Posts Tagged ‘Pensions industry

Future pensions: the view from the NAPF mountain

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A state pension worth around 1/3rd of average earnings to provide a robust floor of benefits, supplemented by a workplace pension built around auto-enrolment and mandatory contributions, the whole supervised by a new regulatory settlement based on a standing Retirement Savings Commission analogous to the existing Low Pay Commission.

That’s the vision of the National Association of Pension Funds, the industry body representing scheme sponsors, in Fit For the Future, a new report on pensions published yesterday (press release; full report). Praised by the TUC as offering ‘serious and constructive proposals for the future of pensions‘ there’s a lot in the report to commend, as well as some items for debate.

It’s hard to disagree with the NAPF’s view of the pensions landscape: workplace saving has fallen dramatically both in terms of numbers and in terms of the value to ordinary workers of the pensions generated there. Rightly, the NAPF doesn’t spend too long analysing how this situation has come to pass, but is oriented more towards what can be done to stop the decline and get the principle of workplace saving back on track.

There are many factors which help to account for why this situation has come to pass, as these pages have already argued; though it would be perhaps rather churlish in this context to remind that decisions to close schemes appear to stem largely from the unsympathetic and ruthless cost-cutting actions of scheme sponsors themselves. The Connect Sector of Prospect has some experience of negotiating alternatives where employers are looking to move away from defined benefit provision; outside this experience, that employers have tended not to stop anywhere in the middle of the pensions continuum but have leapt straight from defined benefit to defined contribution is less of a reflection of the lack of risk-sharing alternatives, as the NAPF directly suggests, than of the realities of employment relations in the 1990s: employers have done so because they can; and because the will to do something more creative (but evidently more costly) has not, except in a few, admirable cases, been found.

Despite the acknowledgement that ‘workplace pensions remain central to providing people with an adequate
retirement income’ and that workplace provision is ‘at the heart of good pension provision’, the central role in the NAPF’s vision is occupied not by workplace saving, but by a beefed-up state pension scheme – perhaps rather surprisingly, for an organisation representing (workplace-based) scheme sponsors, but perhaps a reflection that what has been lost will be hard to replace other than by slow incremental steps, starting from the 2012 reforms. Even within the context of workplace savings, the primary place in the NAPF programme is taken by a suggestion for a maximum of twenty ‘super trusts’ whose role would be to offer members of small schemes the low charges facilitated by the benefits of scale – a worthwhile, and supportable, idea alongside the NEST but whose contribution to revitalising workplace provision might well turn out to be less than dynamic.

Other suggestions from within the workplace savings context include offering ‘core’, unindexed pensions to scheme members only (it seems to me that indexation is an under-appreciated pensions benefit; while a focus on the scheme member only might be supported when retirement is far away, but deeply regretted once into retirement since ensuring loved ones are provided after your own death becomes much more important the closer you get to that point); improved mandatory contributions to the NEST (definitely supportable); better advice to accounting standards bodies on accounting for pensions (likewise); and a new statutory objective for the Pensions Regulator to promote good pensions provision (clearly a good idea).

So, there are some worthwhile things to explore in this document and the NAPF is to be congratulated for putting it out. It would be a shame if its publication at this point in the electoral cycle led to its many good ideas being lost to public debate. Nevertheless, in the meantime, I’m reminded once again that quality pensions expanded and became more beneficial at a time of labour strength; their contraction at a time of labour weakness simply proves that advances in benefits have to be won by collective action and are not given away by employers for free.

NEST charges set at 0.3%

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The DWP has confirmed the charging structure for NEST – the National Employment Savings Trust (the new name for the system of personal accounts being implemented from 2012). This has been welcomed by the Personal Accounts Delivery Authority.

The structure will have two components:

– an annual management charge, levied on the value of funds in the account, of 0.3%

– a 2% charge on contributions.

The latter is intended to be an interim measure intended to fund PADA’s start-up costs, after which time the charging structure is expected to fall away to leave only the 0.3% AMC. PADA has published an accompanying briefing note arguing that this structure meets the aims of the Turner Commission and that the twin element leaves median savers in the target group, even in the short-term, better off than with an AMC of 0.5%. Certainly it meets the government’s response to the Turner Commission, which centred on a belief that it was possible to achieve an AMC at a rate of 0.5% of funds invested in the short-term and below 0.3% in the long-term.

The PADA report also argues that such a charging structure is significantly lower than what most savers in the target group could currently achieve (not least in comparison with stakeholder pensions) and one comparable to that achieved by high earners and savers in large schemes. Clearly those in the scheme from the beginning will be faced with higher charges than those who come in later – and arguments have been raised that those saving for a short time before retirement are likely to be hit relatively highly by the charging structure (see BBC news report). Nevertheless, if PADA is right that such a structure is equivalent to a 0.5% AMC at the median, then such arguments do carry less weight (although PADA does acknowledge both situations in its report). It’s also true that those who are in the situation and with funds less than, currently £17,500 may also benefit from the trivial commutation rules.

The impact of a low charging regime on pensions in payment under the scheme is key, as David Pitt-Watson’s RSA report recently explained, and its achievement in this context will help NEST achieve its main objective in addressing the problem of under-saving for retirement amongst low to moderate earners. (Pitt-Watson repeated this point at the recent launch of the Unions21 report Tomorrow’s Pensions.) Figure 3 of the PADA report also highlights the impact of high charges on the overall pension pot – in particular for those switching between schemes.

So – another welcome step along the road to the establishment of NEST. Nevertheless, it is somewhat worrying that research continues to highlight that a higher proportion of those in the key target group are likely to opt out of auto enrolment in workplace saving – up to 40% of low-paid workers on less than £15,000. Clearly auto enrolment and NEST are different concepts – up to the point that auto-enrolment in companies that do not currently offer a scheme is likely to conclude in enrolment in NEST. Political uncertainty over the future of NEST cannot help, and it is clear that there is a level of confusion – backed up by misinformation, some of it deliberate – out there which precludes a more positive reaction at this stage.

As part of the education campaign for which Hymans Robertson is also calling, there is a need for clear, explicit and punchy arguments of the merits of workplace savings, not least in NEST. Here’s my starter for five:

1. a 4% personal contribution triggers an additional 1% from HMRC and, more importantly, 3% from the employer: a doubling of your savings at no cost to yourself. And it’s part of your pay, just deferred until you retire.

2. workplace saving is an easy way to start to save, and then to keep doing so, since the money comes straight from your wage packet

3. the state benefits on which you might now be relying to save you from poverty in retirement may not be there when you get to retire, or they might not be worth what they are now

4. low charges in NEST means more of your savings go to fund your pension pot

5. decent flexibility: you can change your contributions whenever you want and, once you reach 55, you can get at your funds whenever you want.

Any others?

Written by Calvin

16/03/2010 at 6:11 pm

Posted in Pensions

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NAPF calls for budget for pensions

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The National Association of Pension Funds has today called for a budget for pensions (press release; full submission) which addresses a couple of its long-running campaigns: firstly on the need for the government to increase the supply of long-dated and indexed gilts (which these pages have supported); as well as a call for the re-structuring of the last Budget’s intention to taper higher-rate tax relief for those earning above £130,000 (which they haven’t).

Issuing more gilts will help pension schemes and would be a welcome development in the light of the continuing decline in the numbers of people saving in defined benefit schemes, since it is one which would help support those schemes which remain by matching the demand of occupational schemes as well as by reducing the strain on company balance sheets caused by volatility. The NAPF also argues that it is likely to assist the government with a cheap and secure source of finance given the suspension of the quantitative easing programme.

Concerning the higher rate taper, the NAPF has upped the ante a little by drawing up three case studies of people earning as little as £40,000 who may – by an unhappy conjunction of circumstances – be caught by the new rules. I don’t want to get too caught up in these simply because the circumstances for ‘Dave’ themselves – 25% rise in pay following promotion, rise in bonus, car allowance and relocation resulting in the award of a hefty cash allowance – seem to be a little unlikely, not least to members of the Connect Sector of Prospect, but also because they are likely to be worked around in the tax efficiency planning that is likely to apply to individuals in these situations. That includes with respect to redundancy payments, too (and there are a host of consultants just waiting to advise). And because all the situations are one-offs, occurring in one particular year, compared to the regular earnings which is the main target of the taper, I’m not sure they’re terribly helpful, either (other than in illustrating some potential pitfalls).

It remains correct to address the imbalance in tax reliefs earned by this part of the population, as the Chancellor is seeking to do: 1% of the population earn at this level (perhaps more correct to say regularly earn at this level) but they receive 25% of tax relief.

What I was attracted by, however, and thus in isolation from the issue of the taper itself, was the NAPF’s quid pro quo for abandoning it: a reduction in the annual allowance for tax-free pension contributions from £245,000 to a figure between £45,000 and £60,000 (figures which, of course, remain well beyond the means of most ordinary pension savers). Not being a tax expert, I don’t know how this works out in terms of likely tax yield or its spread across taxpayers more generally, both of which are clearly critical, but it does seem an interesting option in terms of exploring how what money is made available by the Treasury for pensions tax relief is fairly distributed. The NAPF, which points out that the figures to work out the likely yield simply aren’t in the public domain, argues that it is likely to achieve savings which are at least as much as it believes the measure will yield in practice – and perhaps as much as the Treasury thinks it will. (Nice work, there!)

I’m not sure how this squares with one of the NAPF’s criticisms of the taper (that high-paid executives will lose interest in good quality pensions if they become disengaged from them) – surely the same argument applies if annual tax relief is limited to a maximum of £45,000-£60,000 in pension contributions. Nevertheless, when there is a need to encourage both scheme sponsors to offer good quality workplace provision and to encourage people that pension schemes are worth having and saving in, not least among the low paid, looking at how available tax reliefs are used and distributed is an important consideration.

Written by Calvin

25/02/2010 at 5:38 pm

Well that worked, didn’t it?

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A belated reaction to last Friday’s decision by Alliance Boots to close its two final salary pension schemes to future accrual.

The company insists that the decision has not been made on cost grounds, but there appear to be two rationales drawn from the company’s own reported words:

1. protect the business from the effects of pension funding volatility

2. ensure the long-term sustainability of the group’s UK retirement savings schemes (which of course encompass DC provision as well as the DB schemes being closed).

With regard to (1), Boots was the first major company to opt to switch its pension fund assets entirely into bonds rather than equities – a move it undertook around ten years ago (for some techie background, see here for article by John Ralfe, written while he was Boots’s head of corporate finance and a member of its trustee investment committee). Bonds are low growth vehicles but which don’t jeopardise capital assets, and such a move was touted at the time as a solution which would lock equities-driven asset values into the asset bases of mature schemes.

Only, it doesn’t seem to have worked. One likely reason for this is the increasing growth in longevity in retirement – which, to compensate for without recourse to the scheme sponsor, is likely to require pension funds being invested in assets that are, well, a little more exciting. Indeed, The Times reports that the Boots schemes has previously switched back at least a portion of its assets into equities and property since the date of the last assessment of the scheme’s health (March 2009). Reading between the lines of the story in The Times, I’m wondering whether, despite having been in surplus last year, the forthcoming formal valuation is likely to show a deficit in the schemes, perhaps driven by a combination of increasing longevity and the impact of the Bank of England’s quantitative easing programme in lowering bond yields (and thus inflating scheme liabilities). Certainly, the purchase of equity-based assets within the last year is likely to have been a policy which, currently, will show strong returns. If there is such a deficit, it will require a recovery plan to be put in place, entailing higher expenditure from the company. This would certainly explain the rationale of ‘protecting the business from the effects of pension funding volatility’ – a somewhat differently-faceted explanation than one based on cost alone.

This is also a timely reminder in the context of Ofcom’s Pensions Review that schemes need to invest in a range of investment vehicles appropriate to their membership profile, not to concentrate in one or other type of vehicle. A mix of assets is likely to remain the most sensible investment strategy. Again, of course, it also amounts to a plea for a long-term perspective on pension fund investments- one to which, however, the private equity owners of Alliance Boots may not necessarily be sympathetic.

As regards the second explanation, the Times’s revelation that 70% of Boots employees are not members of any schemes (the DC schemes have around 5,500 members, compared to around 15,000 in the closing DB ones, out of a total UK workforce of around 75,000), in conjunction with its own reference earlier in the article to the 2012 reforms, tells its own story. Given these extremely low participation rates, auto enrolment will indeed present its own challenges as regards the total sums invested in providing employee pensions, even on the basis of use of the National Employment Savings Trust scheme, still less on the presumption of the continuation of Alliance Boots’s scheme which is likely to operate on the basis of a higher employer contribution rate than that which will fund NEST, at least in the first instance.

If the issue is one of the effects of the quantitative easing programme in inflating scheme liabilities, then today’s call by the NAPF for the issue of more long-dated and index-linked gilts is timely as regards the continued survival of other DB schemes. It’s a call that the NAPF has made before, and it remains a supportable one.

Finally, it also remains true that the best protectors of members’ interests in pension schemes continue to be a cadre of well-trained, independent and vocal member-nominated trustees firmly backed by trade union organisation. Schemes with such an independent presence on the trustee boards are likely not only to be well-run but also more accountable in terms of the decisions they make. That’s a lesson which all too often is only learned when it’s too late.

Written by Calvin

05/02/2010 at 4:49 pm

Pension funds make money in 2009

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Bank New York Mellon Asset Servicing (why? just why?) has published a press release saying that UK pension funds earned an average 14% return in 2009 – the best return since 2005.

This represents a real return of some 14.9% given where the Retail Price Index has been during 2009.

I’d have a few quibbles with some of the methodology used in the release (the full year figure is a weighted average of an estimate of returns in the final three months of the year ‘linked to‘ the three previous quarterly weighted averages of returns), which has evidently been produced so that BNY can get in with its own figures early in 2010, not least for its own marketing purposes. So, a good deal of caution needs to be exercised around the figures. It’s not, for example, useable as a benchmark by which pension funds can measure the performance of their own investment managers during the year.

Nevertheless, the same figure for 2008 saw pension funds earn a return of -13.6% – so, essentially, on this basis, 2009 shows a remarkable turnaround, with the losses of 2008 now having been made up. A year’s growth has been lost (or, more accurately, two) but, otherwise, this would indicate that pension funds ought in general to be more or less back where they were, asset wise, at the end of 2007. This more healthy state for schemes, certainly compared to their position at the end of 2008, is thus a welcome sign that some of the pressures that schemes have been facing, which have led some scheme sponsors to make changes to occupational provision including scheme closures, may be coming to an end.

That is, of course, not the same as saying that such changes may themselves be coming to an end. But it does mean that closure decisions based on scheme funding positions at the end of 2008 do, as a result, look increasingly opportunistic.

Written by Calvin

06/01/2010 at 5:09 pm

Posted in Pensions

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ACA calls for Pensions Commission

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In a further sign of the breaking down of the 1990s pensions consensus, the Association of Consulting Actuaries has today called for a Pensions Commission to ‘challenge the legal and regulatory hurdles standing in the way of sensible long-term pension designs’.

Reporting of the ACA survey has been quite widespread, with both the BBC and The Guardian giving space to ACA’s view that the decline in quality pensions provision is evidence of the failure of public policy (though the first part of the BBC report has been extensively re-written around the DWP’s reaction to the survey).

We should mention here that one of the contexts to the ACA survey and its call for a new pensions commission is likely to be the DWP’s rejection of the conditional indexation model proposed by ACA during its deregulatory review.

That there has been a decline in quality workplace schemes is self-evident. Its impact on the pensions of future generations of pensioners, and on state finances, is also quite clear. Whether we need a new pensions commission, before the proposals for tackling the decline in workplace saving made by the last one have yet been introduced, is a moot point. At the same time, the plethora of reasons why quality schemes have been closed in recent years stacks so high that to pick out failures of public policy seems, by itself, to be somewhat perverse: in my view, reasons why company schemes are closing are little to do with public policy and more to do with companies exploiting a period of worker weakness to erode a vital (and admittedly costly, at the moment) part of employees’ terms and conditions of employment based on short-termist considerations and fuelled by accounting standards that are unsympathetic to the long-term nature of pensions provision. The tide of scheme closures, in the face of DWP attempts to deregulate provision, seems evident proof that the policy ‘failures’ lie less at the public level than the corporate one.

Likewise, any attempt by employers to use auto-enrolment to reduce their investment in pensions at the individual level, on the grounds that auto-enrolment will increase overall costs, needs to be seen not as a failure of public policy but a function of the same attack by employers on terms and conditions. Nevertheless, ACA has done a favour in highlighting the potential for levelling down by employers, also highlighted some time ago by Tom’s post at labour and capital, and, if this is a likely outcome, it is one that will need to addressed in the regulations surrounding auto-enrolment.

A new pensions commission is unlikely to emerge with anything new. It will be distracting; the reforms proposed by the last one need to introduced and bedded down as a priority; and another pensions commission is, by itself, unlikely to see any change in the rate at which schemes are being closed. Getting bogged down in another discussion about conditional indexation is the last thing that is needed right now.

Pensions remains a complex area with many nuances, but, like climate change, it is one that is increasingly looking to be one which divides left and right.

Written by Calvin

04/01/2010 at 6:39 pm

Collective DC schemes – DWP speaks (softly)

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To very little fanfare (to whit: no press release), the DWP has published three documents on how collective DC schemes might operate in the UK.

Collective DC schemes are a Dutch invention and their potential applicability in the UK, encouraged by particular proposals from Hewitt Associates, first came to light in 2008 during the DWP’s continuing examination of risk sharing in the pensions context. Essentially, a collective DC scheme is a pooled investment vehicle based on a particular set of target benefits, paid for entirely by the employer, with employees paying additional contributions for an improved set of benefits. This type of arrangement also potentially lends itself very well to quality governance arrangements based on a board of trustees. In the shift from defined benefit to defined contribution, collective DC has something to offer and Connect earlier welcomed the opportunity for their further exploration, albeit outside the specific context of risk sharing.

The DWP ‘package’ consists of a summary document, a modelling of the likely operation of collective DC schemes in the UK and a research report into employer attitudes, including the scale of likely demand. The conclusion is that the government needs to take no further action, not least since the positive outcomes of these sorts of schemes in some areas are, the DWP concludes, outweighed by the drawbacks – while employer demand is likely to be limited.

The latter is, of course, a key criterion. The DWP’s research here concludes that employers have different approaches based on the the type of scheme currently operated but that, overall, demand would probably remain low:

– sponsors with open DB schemes considering closure and employers that had already moved to a DC scheme would not consider collective DC on the grounds that the additional costs compared to a DC scheme were not justifiable [that says sufficient!]

– employers with trust-based DC schemes were reluctant to add to trustee duties since trustee recruitment would become more difficult [hmm]

– employers with contract-based DC schemes who would like to deliver a better pension to their employees might, however, consider a collective DC scheme, especially if these became the expected norm.

This overall conclusion is something of a shame, since collective DC schemes do offer a more beneficial approach to pensions saving than ‘pure’ DC, while remaining of the DC type – i.e. they contain no guarantees that the ‘targets’ for the retirement benefits will be met. The ‘collective’ approach is evidently attractive in a trade union setting – although one of the reasons for the DWP’s conclusion is that the dangers of inter-generational cross-subsidy might lead to perceived unfairness – while, as Kay Carberry, Assistant General Secretary of the TUC, has argued this morning, collective DC does potentially offer something towards the fundamental need to improve governance in DC arrangements (many of the hard-fought-for improvements in pension scheme governance is endangered by the sliding away of DB schemes).

Nevertheless, it is the employer approach to costs which is the key. An employer-only contribution of 12% (and for a not particularly attractive basic benefit of a 1% career average scheme and retirement at 68) represents something of a ‘challenge’ to employers making an average contribution into DC schemes of just 7.00% (albeit that this figure is rising). As always, the scale of contribution that an employer is prepared to make is the acid test of its intentions – and, it would seem, a contribution of 12% lies beyond where employers are – currently – prepared to go.

Challenging that – and pushing that boundary further – will be a key task for unions and employees as the economy improves. Exposing the inadequacy of pensions based on an insufficient contributions structure will be a major component of that, in which the structures and benefits provided by a collective DC scheme might play a useful comparative role. In this context, I hope that the concept is not entirely dead.

Written by Calvin

16/12/2009 at 1:12 pm