Could the introduction of the National Pensions Saving Scheme (NPSS) result in another wave of employers closing company schemes?
It is likely to lead to the demise of occupational pension schemes as major providers of income for pensioners. Four-fifths of final salary occupational schemes have closed to new members over the past 10 years but around 80% of these closures have occurred since 2000. Many and perhaps most of the occupational schemes open to existing members will seize the opportunity to cut the firm’s pension contribution rate and instead opt for a 3% NPSS contribution.
After five years of scheme closures, the employers still offering a pension scheme must perceive it as worthwhile, so fears that more will ‘downsize’ when the NPSS is established may be misplaced. We believe that regulatory costs and actuarial changes pose a more serious threat.
Will the new pay-as-you-go basic state pension work?
The PAYG system, which will be funded by today’s taxpayers, is unsustainable in the long run – you cannot guarantee that tomorrow’s workers will foot the bill.
The idea is to provide everyone with an adequate foundation for further personal pension saving, which today’s state pension patently is not. But the proposals will take several decades to reach this level, so will not work well for people nearing retirement. The costs of this improvement look manageable, so in that sense should not cause a problem.
What is the best way to create a sustainable pension scheme?
A major new initiative between public and private sectors aimed at providing a Universal Protected Pension (UPP) of 25-30% of average earnings at retirement, with the real value of the pension maintained against earnings throughout retirement. Trustees will set contribution rates, which will deliver this guarantee. It is our belief that a technocratic structure, such as the UPP, located outside of the political system, would deliver predictability and stability.
Public education. Schemes will be sustained when people understand pensions better and are demanding them as employees, trade unions and voters.
Do you think it makes sense to have a funded scheme that runs alongside the PAYG?
Yes. If funded were to completely replace the PAYG scheme, you would end up with the problem of double payments, where contributors pay for existing pensioners and for their own future pensions. Part-funded, the basic state pension would also allow you to spread risk more effectively.
Yes. Balancing the risks of both schemes makes sense. But the funded scheme must have credibility if people need to be persuaded to use it, and the financial services industry has a lot to do in this regard.
Should pensions carry a minimum payout so future pensioners will be kept above the poverty line?
It is central to any reform that future pensioners are kept free of means-tested benefits. A UPP will act as the effective building block for future savings.
No. It is the government’s job, through the two state pensions, to ensure people can retire with an income above the poverty line. A key reason for our current ‘crisis’ is that pensions policy has come to depend on private arrangements propping up retirement incomes, and the sooner we see them as earnings-related rather than basic income, the better.
What measures do you advocate right now?
Maintaining the existing basic state pension linked to prices during a person’s working life. Also, building up a funded provision alongside the existing basic pension. Combined, these will guarantee a minimum income of 25% of average earnings during retirement.
The funded provision will cover the cost of uprating the Basic State Pension component in line with earnings at retirement, while meeting the overall cost of a pension of not less than 25% of average earnings. It will also maintain this overall pension in line with earnings throughout retirement.
Crucial to the new ‘road map’ is the issue of working longer, both before and after the state retirement age. To make this happen, there needs to be much more training and support available to older workers, and more flexibility from employers in the employment packages they offer.
Simply announcing a new retirement age is not enough: there needs to be an active reform strategy for the labour market.
The streamlining of pension regulations will also be better for the public, but of greater benefit to employers and administrators. Things will get much simpler for the public when the system of annual pension forecasts becomes fully operational.
- Pensions changes coming into force on 6 April
Contracting-out, Protected Rights and Safeguarded Rights (Transfer Payment) Amendment
- Occupational and Personal Pension Schemes (Miscellaneous Amendments)
- Personal Pension Schemes (Appropriate Schemes) (Amendment) Regulations 2005
- Occupational Pension Schemes (Trustees’ Knowledge and Understanding) Regulations 2005
- Occupational and Personal Pension Schemes (Consultation by Employers) Regulations 2006
- Pensions Act 2004 (Consultation by Employers) (Protections for Nominated Representatives) Regulations 2006
- Pensions Act 2004, sections 269 and 284
- Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2006
For details of what these changes mean, see the timetable of changes at www.personneltoday.com/timetable
- 45% of organisations operate defined contribution pension schemes
- 31% offer group personal pension schemes
- 47% of the 50% of respondents that still operate defined benefit pension schemes have now closed these to new entrants
- The average pension deficit was 15% of respondents’ total turnover
Source: Jardine Lloyd Thompson – results based on 381 responses from a wide range of business sectors
Head of public affairs
Chartered Management Institute
Approximately 80% of the workforce for 2020 is already in employment. This means individuals must plan their careers in a new light and prepare for their retirement accordingly. The days of a single, linear career are over and employees must take some responsibility for creating new opportunities and challenges in their later working lives. But, for this to happen, organisations must adapt to ensure older workers are treated as an asset and offered flexibility. In practice, this will mean focusing on upskilling and reskilling, with retention of skills being the key driver of retirement policy.
The interesting thing for me is what happens in the wake of the Turner Report. If the government picks up all the elements of the report, it will recognise that you need a higher, guaranteed state pension. More will have to be done to get employees and employers to contribute to a pension – and that’s where the NPSS comes in. I don’t believe it will lead to the closure of final salary pensions schemes, as they will close for other reasons. The critical thing is that there is a second tier in place so people can have a healthy income after retirement.
Senior technical consultant
We are in a year of major change in the private sector as defined benefit schemes are now the exception rather than the rule. In recent months, a number of large schemes, such as Rentokil, have talked about closing down. If that builds momentum, it’s likely that pensions will only be offered on a defined contribution basis. Beyond that, what happens with the government’s recommendations for the future will be interesting. One of the downsides of the NPSS could be that schemes currently offering better provisions may chose to only offer the minimum requirements. If this happens, it could lead to a dumbing down of many of the best pensions provisions.
HR business partner for UK
Ireland and South Africa
Legislation will shift so there is more onus on business to be responsible in the pensions arena. There is likely to be an increased requirement to put pensions contributions into contracts. I see this affecting five-100 employee-type companies who don’t already have these provisions in place, but the likelihood is that most of the costs will be offset anyway. The difficulty is to really understand how pensions are going to change with the retirement age, pensions shortfalls, and the government’s requirements to increase state funding in their own pensions. But the simple fact is that if we don’t do something soon, we will have a major problem in 30-40 years. It has to be done now for the country’s future prosperity.