- Retirement Ages
- Auto-enrolment and National Employment Savings Trust pensions (NEST pensions)
- Public sector defined benefit schemes
- Regulation of defined benefit schemes and defined benefit pension protection
- Pensions tax issues for high earners
- Equalisation of guaranteed minimum pensions
- Liberal Democrat pension policies
In this General Election, the parties are all too aware that pensions are a live political issue, with widespread concern about the extent to which the current pension system will cope with providing sufficient retirement benefits for an ever aging population. The major parties have taken different approaches to a range of pensions policy concerns.
This briefing identifies the key points, and the practical implications for business.
Currently, the state pension age is 60 for women and 65 for men. This is planned to rise for everyone to 66 from 2024, 67 from 2034 and 68 from 2044.
David Norgrove, Chairman of the Pensions Regulator, has stated that he believes the state pension age will ultimately have to increase above age 68
- For Labour, Angela Eagle, Pensions Minister, has said that she disagrees with the assertion that the state pension age should be raised beyond current plans.
- The Conservatives propose raising the state pension age to 66 for men by 2016 and for women by 2020.
At present, workers who reach the state pension age become entitled to a basic state pension of £95.25 per week. This is funded mainly by National Insurance contributions from the current generation of workers and their employers.
- The Labour Party has stated that it wishes to re-link the basic state pension to earnings at a time in the future when this is affordable. The aim is to do this by 2012 or by the end of the next Parliament at the latest.
- The Conservative Party has stated that it wishes to raise the basic state pension in line with average earnings to stop the spread of the means test.
With regard to work-based pensions, the Department for Work and Pensions is reviewing the current default retirement age of 65. Current speculation is that it will be raised or scrapped.
- For Labour, in an interview with the Daily Mail in January 2010, Harriet Harman described the current default retirement age as “arbitrary”. This has been viewed as a hint that the Government may consider scrapping the default retirement age.
In an article published in February 2010, Theresa May, Shadow Secretary of State for Work and Pensions, has said that the Conservatives would review the default retirement age to allow for greater flexibility and encourage working beyond that age where it is practical to do so.
Auto-enrolment and National Employment Savings Trust pensions (NEST pensions)
Workplace pension reform has been one of the key changes proposed by the current Labour Government.
- Under the Pensions Act 2008, employers will be required from 2012 to arrange the auto-enrolment of eligible workers into a scheme that reaches minimum standards and to which employers must make minimum contributions; that is, employees being automatically enrolled into their employer’s qualifying pension scheme without any active decision on their part. The schemes were originally known as “personal accounts” but were re-branded in January 2010 as National Employment Savings Trust (NEST) schemes.
- The Conservatives are supportive of auto-enrolment, seeing it as a positive step forward and one that should be introduced earlier than under Government proposals. The Conservatives said in February 2010 that they would introduce auto-enrolment early on a voluntary basis, ahead of the launch of NEST pensions. However, they have concerns over the complexity of the current auto-enrolment mechanism.
The Labour Government proposed and pioneered the concept of NEST pensions as set out in the Pensions Act 2008. NEST pensions will be trust-based occupational pension schemes regulated by the Pensions Regulator and they will be designed primarily for low to moderate earners.
- The Labour Party’s view from the outset has been that NEST pensions will put in place a sustainable, affordable and trusted pensions system which will meet the needs of the country and future generations. In spite of criticisms of its workings, the Pensions Minister Angela Eagle in August 2009 defended the measure as meaning that “11 million people have the chance to save into workplace pensions with employer contributions”.
- The Conservatives have confirmed that they will not scrap NEST pensions, but they are concerned about, and wish to review, what NEST pensions will deliver and how NEST pensions will be implemented. In February 2010 Nigel Waterson, Shadow Pensions Minister, is reported to have promised an immediate review should the Conservatives win the next General Election. Referring to the role of the Personal Accounts Delivery Authority (PADA), he said, “the Government is very unwilling to share what is going on with PADA, and we don’t want to inherit something that is going to fail,” adding “we have a Plan B, but we’re not making it public and we hope we won’t need it”.
Many employers will already operate a scheme that is more generous than NEST. In the future, NEST pensions may become the benchmark which sets out the lowest level of benefits that can be provided when establishing a new pension arrangement for employees. Should the Conservatives win the forthcoming election, it will be interesting to see how far-reaching their policy on auto-enrolment and NEST pensions will be.
Public sector defined benefit schemes
Public sector defined benefit pension schemes have some of the largest pension liabilities in the UK. Unlike most private sector schemes, many such schemes are unfunded and remain open to new entrants.
- The Labour Party has stated that it does not wish to close public sector defined benefit pension schemes. In July 2009, the Pensions Minister, Angela Eagle, has expressed the view that the public sector pension provision is sustainable with recent changes in the NHS, Local Government and Teachers’ schemes, such as cost-capping and increases in retirement ages for new joiners.
- For the Conservative Party, Theresa May, Shadow Secretary of State for Work and Pensions, said in June 2009 that it would be “irresponsible to ignore the rising cost of public sector pensions”. In an article published in February 2010, she also said that the Conservatives would ask their proposed Office of Budget Responsibility to conduct an audit of public sector pensions.
- The Conservatives have not said that they will seek to scrap public sector defined benefit schemes; instead, they have stated that no firm decisions have been taken and nothing has been ruled in or out. However, at the Conservative conference in October 2009, the Shadow Chancellor George Osborne proposed a cap on public sector pensions above £50,000 (this was repeated in February 2010). The Shadow Pensions Minister Nigel Waterson has stated in Pensions Week that he favours the closure of unfunded defined benefit schemes.
Regulation of defined benefit schemes and defined benefit pension protection
Final salary schemes have been in decline for many years. In recent times trustees and employers alike have found themselves burdened with new and voluminous pensions legislation and regulatory guidance.
- The Labour Government has overseen the introduction of the Pensions Regulator and the Pension Protection Fund, in part to seek to make occupational pension schemes more secure. The Pensions Minister, Angela Eagle, has suggested that she will consider making it easier for final salary schemes to function in return for employer promises that defined benefit schemes shall remain open. In an interview in August 2009, she said: “We are continuing to look at other areas where we can assist in trying to get the balance right in defined benefit (final salary) between security and protection for the members – which became a situation post-Maxwell – and also get into a situation where we are actively encouraging employers to close defined benefit (final salary) schemes – which is what we do not want to do. There is always a balance to be struck there.”
- In response to pension industry concerns that the current employer debt regime was hindering corporate restructuring in the current economic climate, the Department of Work and Pensions published a consultation paper on new employer debt regulations. The new regulations, in force from today, provide employers with two new options to enable corporate restructuring transactions to proceed without triggering an employer debt.
- The Conservative Party’s view is that recent pensions legislation and regulations have hindered flexibility and stability. The Conservatives called for emergency pension protection in light of volatile financial markets, in particular to protect people who are required under legislation to take their pension by age 75. In addition, the Conservatives have said that they will seek to end compulsory annuitisation at age 75 in the future.
- In response to concerns over defined benefit schemes Theresa May announced that “new approaches” to final salary schemes would be explored, such as hybrid schemes and early access to pensions, so that companies could retain such schemes.
- Nigel Waterson, the Shadow Pensions Minister, has indicated that the Conservatives are keen to pursue a deregulatory agenda, specifically reviewing rules on surpluses, debts under section 75 of the Pensions Act 1995, statutory override and risk-sharing.
Deregulation is likely to benefit both trustees and employers who have felt burdened by legislation in recent years, but previous efforts at simplification have failed. Our view is that the new employer debt regulations will only apply in limited circumstances and so will make little practical difference for employers.
Pensions tax issues for high earners
Until April 2009, individuals were entitled to tax relief on pension contributions at the highest rate of income tax that they pay.
- The Labour Government has announced that, from the 2011/2012 tax year, people with an annual income of between £150,000 and £180,000 will be subject to a gradual tapering away of tax relief on pension contributions. The effect will be that those earning above £180,000 will be restricted to relief at the basic rate of tax. In order to prevent high earners making significant contributions in the two tax years leading up to 2011/2012 the Government introduced “anti-forestalling” measures.
- In his 2009 Budget, Alistair Darling explained these developments by stating: “It is important that everyone is encouraged to save for their retirement – and we will continue to support them to do so. But I intend to address the anomaly which sees a tiny proportion at the top taking a large slice of the help we give people to save. It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1½ per cent of pension savers.”
- At the Labour Party Conference in September 2009, Alistair Darling added that: “It is right that those who earn the most should shoulder the biggest burden.”
- The Conservatives argue that this breaks the “covenant” between savers and the Government, as responsible savers will be penalised, instead of being rewarded, for setting aside some of their income in saving for their retirement. In addition, there are concerns over the lack of detail outlined in the proposals and its impact on self-employed individuals.
- The introduction of the anti-forestalling provisions of the Pensions Act 2008 means that for the next two years there are limits on the amount of tax relief that is available to high earners. In the Pre-Budget Review on 9 December 2009, it was announced that individuals with incomes of £130,000 or over may be affected by this measure should they change their normal pattern of pension contributions or the way that their pensions benefits accrue. This was subsequently confirmed in the March 2010 Budget.
- Writing in February 2010, Theresa May said that the Conservative Party did not support Labour’s policy, but “given the dreadful state of the public finances, we cannot pledge to reverse it at this point”.
In the March 2010 Budget, in relation to pensions and tax, the Registered Pensions Scheme 2010/11 Lifetime Allowance of £1.8 million and the Annual Allowance of £255,000 will continue to apply at these levels for the next five years, up to and including the tax year 2015/16. These provisions are effective as of 6 April 2011.
The tax changes are very complex and will pose difficult challenges on how best to remunerate high earners. This is exacerbated by the surprise announcement (on which there has been little press comment or reaction from the other parties) in the March 2010 Budget regarding the decision to freeze the allowances which were introduced on 6 April 2006.
Equalisation of guaranteed minimum pensions
It has been reported that through a written statement from Angela Eagle, the Pensions Minister, the Government has appealed to trustees to equalise guaranteed minimum pensions and therefore remove any inequality in pension scheme rules which results from the legislative provisions governing guaranteed minimum pensions, regardless of whether a comparator exists. The Conservatives have not commented on this and to date, the Pensions Regulator has not provided any statement or guidance.
This is another unwelcome complication for pension schemes and the cost of compliance will be high.
Liberal Democrat pension policies
- The Liberal Democrats would seek fundamental reform and scaling back of public sector pensions, starting with an independent review.
- The Liberal Democrats have also expressed an intention to restrict income tax relief on pension contributions made by all individuals to the basic rate of 20 per cent.
- The Liberal Democrats back the reintroduction of the link between the state pension and earnings at a time in the future that it is affordable to do so.