Transcripts
"Rethinking Retirement"
by Tom Collinge, London
More pensions regulation could be counterproductive
Pensions have been in the news for years. In the past, headlines focused on State pensions; nowadays it is occupational pensions on the front page. Suddenly there is talk of a "pensions crisis", but what has changed?
To begin with, the value of shares has dropped significantly since the end of 1999. The FTSE 100 index is currently close to 4000, down from nearly 7000 only three years ago. Since private sector occupational pension schemes in the UK have historically held up to 80% of their assets in equities, their value has inevitably been hard hit. During 2002, the markets suffered particularly large reverses. However, occupational pensions have been affected by more than just market conditions.
"More old people"
People are living longer than used to be the case. Greater longevity is a blessing, but it does make pensions more expensive to provide. Furthermore, the capital cost of providing income in retirement direct from a pension scheme or via annuity purchase, has increased because interest rates are down to lower levels.
The combination of these higher costs and dwindling returns means that pension contributions ought to rise. This solution contains its own problems. In the past, many pension schemes operated with surpluses. This meant that they could "live off their fat" during adverse investment periods and leave contribution rates unaffected.
The Inland Revenue became unhappy with this and now limit the amount of surplus company pension schemes may carry forward. Occupational schemes have consequently entered this bear market with far less scope to absorb losses. Surpluses have all too frequently been replaced by deficits.
Although the decision to set up a pension scheme is voluntary for an employer, once set up a scheme is not allowed to persist in deficit. The number of employers who are now required to invest more in their pension schemes to bring them up to acceptable funding levels is increasing all the time. This is putting financial strains on employers.
"Private pensions growth"
Unlike many fellow members of the EU, the UK, with Ireland and the Netherlands, has built up a significant dependence upon pensions from occupational sources. It is UK government policy to encourage a form of partnership between the State and private pension provision.
The aim is to have around 60% of pensions paid over coming decades from private pensions. However, successive UK governments have also introduced huge amounts of regulation. Occupational pensions may be independent of the State system, but they operate in a highly regulated environment.
"Negative side-effects of regulation"
Since some regulation is designed to stop obvious abuses and scandals such as the Maxwell debacle, it is difficult to criticise its value. Nevertheless, there is also a wealth of highly technical regulation. While ostensibly this all operates to protect members' interests, it may be having a more negative side-effect. The cost implications of compliance with complex regulations are regularly cited by employers when they review the pensions they provide.
Recent news stories have shown the plight of people who have lost all or nearly all the value of a lifetime's accrued pension rights once employers get into financial difficulties. There is increasing pressure on government to try to ensure that pensions are more secure and that such instances are avoided.
These are still, fortunately, rare cases, but the fear must be that introducing new regulations to protect pension rights may lead to more employers withdrawing from or downgrading the nature of the pensions they offer. Equally, without some action, public confidence falls away and people fail to save for their retirement out of distrust. And that is perhaps why the notion of a pensions crisis has gathered force. Problems are being revealed in the system and new rules might address abuses, but further regulation could be counterproductive. It is not easy to go forward, but the government has received cogent advice that simplifying pensions provision would be a positive step.
It is also true that a great many occupational schemes are not "in crisis" and that their continued successful existence is essential for the long term health of our State benefits system. Nevertheless, the risk is there that employers and employees may choose to disengage from funded pensions. Worse, people may make no alternative provision for the future. This shift may be slow but, if it accelerates, could bring great damage to all our retirement plans.
Tom Collinge is pensions lawyer for Hammond Suddards Edge
Tom.Collinge@HammondSe.com
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