Occupational pensions - continuous revolution

by Joanne Segars, CEO, National Association of Pension Funds

The world of workplace pensions seems to have been in a state of continuous revolution. Since 1995, there have been over 700 sets of specific regulations, four Acts of Parliament, the creation of the Financial Services Authority, The Pensions Regulator and the Pensions Protection Fund. There has been a general shift away from defined benefit (DB) schemes to defined contribution schemes (DC), with today, most workers in the private sector being in DC schemes rather than DB schemes. Employers have to deal with pension fund deficits, assessing the employer’s covenant and more recently deciding on whether to look at pension scheme buy-outs.

The pace of change has been relentless and is not about to stop. The Pensions Bill currently before Parliament will mean that for years to come workplace pensions will continue to exercise the minds of not just pension fund trustees, but also, the Boards and Finance Directors of sponsoring employers. It is the NAPF’s role to be the voice of workplace pensions which means supporting not only the pension schemes but importantly, also supporting their sponsoring employers to ensure there is a strong workplace pensions sector in the UK.

Part of the answer to keeping a thriving workplace pensions sector in the UK lies in rolling back the regulatory (and associated cost) burden of running schemes today.

When we asked pension funds what steps the Government could take to make it more likely that DB schemes would stay open, the answers came back loud and clear - deregulation and less government interference. The regulatory pressure on UK pension funds and their sponsoring employers has been confirmed by a recent OECD report which showed that the UK places a much higher regulatory and cost burden on DB schemes than almost all other leading economies.

This confirms that the NAPF, working with its 1,300 members, has been right to keep up the pressure lobbying and working with the Government on an initial package of measures to help deregulate workplace pensions. It is not an academic point as employers do not have to offer a workplace pension – still less DB schemes – and if we want to see them to continue, the system has to be easier.

The Government has heeded the message. The Pensions Bill gives employers the much needed flexibility they need to run their schemes. Proposals include:

• reducing the ceiling for revaluing deferred rights for future accruals from 5% to 2.5%. This should save pension schemes an estimated £225 - £400 million per year;
• a commitment to review the impact of pension legislation on normal corporate activity such as restructuring;
• a commitment to look further at easing the conditions under which the employers can receive a refund of pension fund surpluses;
• moving towards principles-based pension regulation in 2010.

These changes are an important start, but they are just that – a start. It will be important to keep the pressure on to ensure there is a regulatory regime for pensions that strikes the right balance between light touch, affordability and member protection.

Deregulation to sustain today’s workplace pensions is only half the reform #story. The other half is the introduction of Personal Accounts which herald one of the most radical pension shake-ups in years. Aimed at the seven million working people without access to a workplace pension, Personal Accounts will be a low-cost, DC saving scheme.

Their introduction will place new requirements on employers of all sizes. From 2012 employers will have to:

• automatically-enrol all employees earning over £5,035 into either the Personal Accounts scheme or their existing pension arrangement;
• contribute at least 3% of employees’ pay on earnings between £5,035 and £33,540 (2006/07 earnings) to a scheme. The employer contribution will be phased in over three years. (Employees will be required to contribute 4% of pay, with another 1% coming in the form of tax relief);
• there will be a three month waiting period for high-quality workplace pensions during which time employers will not be required to auto-enrol their employees into Personal Accounts.

Our Annual Survey shows that 90% of schemes will have to make changes to adapt to the introduction of Personal Accounts. So it will be important to make sure that the costs of these changes are not so great they force employers to throw in the towel where their existing schemes are concerned.

At the NAPF we have been working hard to make sure that Personal Accounts complement existing provision and do not replace it.

Employers will soon have to start thinking about how to make Personal Accounts work within their company’s framework as easily and cost-effectively as possible. There is also a new body, the Personal Accounts Delivery Authority, which is responsible for delivering the Personal Accounts scheme and the system to ensure that employers meet their new obligations.

With a labour market close to full employment and the likelihood that pensions will continue to grow in people’s consciousness, a company’s pension provision, should help employers attract and retain the quality staff needed to run its business effectively. And the attraction of a company pension scheme should not be underestimated. A survey last year by Populus for the NAPF revealed that 75 per cent of people think that having a workplace pension is important. Perhaps more impressively, two-thirds said they would take a lower salary today in return for a pension tomorrow.

The introduction of Personal Accounts will only increase the profile of pensions as a way of recruiting and retaining staff. If a company offers more than the minimum contribution funding requirement needed for Personal Accounts, then this will be a plus point for employees and employers alike.

Pensions will remain high on the political and economic agenda for the foreseeable future. The provision of a good workplace pension is not a one sided game and making life easier for sponsoring employers is a key element of this. It is something that we at the NAPF are continuing to champion.

For more information about the NAPF go to: www.napf.co.uk

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