TUC Response to the Pensions Green Paper
Section One : Executive summary
- A summary of the key points raised in the TUC submission is set out below:
- The TUC welcomes the government’s commitment to produce a long-term and lasting solution to the pensions crisis.
- The future of UK’s occupational pensions system is now at the top of the trade union agenda.
- We welcome the establishment of the Pensions Commission
- The proposals on tax simplification are welcomed, however we are concerned that they will disproportionately advantage the higher paid.
- We welcome government proposals to increase flexibility on how people move from work to retirement; we strongly oppose any move to increase the age at which an individual can draw a pension from 50 to 55.
- The TUC also welcomes the proposals aimed at raising pensions awareness and encouraging take-up of pension entitlements. The TUC has played an important role in this area, and will continue to do so in the future.
- One of the key aspects of the Green Paper for the TUC is the Section on Pensions and the Workplace. We are pleased that the government has identified this in the Green Paper.
- The TUC supports the replacement of the MFR by a long-term scheme specific standard within a regime of transparency and disclosure, we believe that a scheme specific standard should not mean an 'employer' or 'actuary' specific standard.
- The TUC supports measures to reduce the administrative burden on schemes of contracting-out, providing this does not increase the risk of members losing out. The contracting out requirements need to be tightened rather than relaxed. We are therefore opposed in any reduction in the standards required by the reference scheme test.
- The TUC strongly believes that greater protection is required when defined benefit schemes are wound-up. Such protection should be provided by the establishment of a Pension Protection Fund (PPF) to secure preserved pensions on a continuing basis. Solvency insurance should cover any shortfall in scheme assets due to insolvency of the employer.
- The TUC urges the government to reconsider proposals on member nominated trustees to ensure that all schemes have at least 50% of trustees member nominated
- We support proposals on members consultation, and urge the government to introduce such measures immediately.
- We welcome the establishment of an employer task force with the intention of encouraging best practise in pension provision be employers
- We oppose any moves to replicate the American 401(k) system in the UK, we do not believe that it will increase pensions coverage in the UK, this will only be achieved through the introduction of compulsory employer contributions to all workers pensions.
- We are pleased that the government has rejected calls to raise the state retirement age, however we are opposed to an increase in public service pension schemes retirement age from 60 to 65
- We are disappointed by the lack of proposals aimed at improving pensions for women. The TUC will be publishing a separate note on women and pensions outlining our proposals for improving women’s retirement income.
Section Two : Introduction
1.1 The TUC welcomes the opportunity to comment on the Pensions Green Paper Simplicity, security and choice: working and saving for retirement. The comments in this response are the result of an extensive consultation amongst the TUC’s own affiliates and detailed consideration by the TUC General Council.
About the TUC
1.2 As Britain’s national trade union centre, the TUC represents almost 7 million working people through its 69 affiliated trade unions but touches the lives of many more. The TUC is Britain’s largest and best-known voluntary organisation. The TUC’s broad aim is to promote the rights of those in work and to campaign effectively for policies, which help the unemployed in their search for quality jobs. Pensions are a prime example of where unions have been able to promote the interests of working people.
Structure of this submission
1.3 This submission takes the following form
- General Comments
- Informed choice in pensions - choice for individuals
- Pensions and the workplace
- Financial Services - building trust and improving understanding
- Extending opportunities for older workers
- Women, work and pensions
- Conclusion
Section Three : General Comments
1.4 The future of the UK’s occupational pensions system is now at the top of the trade union agenda. The UK pensions system is in crisis. For more than twenty years now the state has been retreating from the provision of an adequate retirement income for all citizens. The persistent decline in the level of the Basic State Pension and the termination of the State Earnings Related Pension Scheme [1] mean that the burden of providing workers with retirement income security now falls squarely on private pensions. Indeed, the Government has made explicit the commitment to shift provision from the state to private alternatives so that in the future 60% of retirement income will come from private sources.
1.5 The TUC recognizes that the Government has done much to help today’s pensioners, too many of whom still live in poverty. The TUC strongly supports the commitment to continue to pay the Winter Fuel allowance at the higher rate of £200 for the remainder of the Parliament. The TUC has welcomed the substantial increases announced to the Minimum Income Guarantee (MIG) and the announcement that in future it would be indexed in line with earnings.
1.6 The TUC welcomes the commitment to help improve the incomes of those pensioners with modest savings through the Pension Credit launched in October 2003. However, a key weakness of the current approach is that means tested benefits do not get through to those who most need them. It is hard to be precise about just how big a problem this is today because the official figures are so out of date. Latest figures refer to 1999-2000 when up to £1.8 billion worth of means tested benefits went unclaimed by pensioners. However, it is often the most vulnerable who fail to claim. The recent National Audit Office Report concluded: 'many low income pensioners have little knowledge about the benefits available to them' with pensioners in rural areas, those with sensory disabilities, and those from ethnic minorities facing additional barriers. The NAO report notes that between a third and a quarter of entitled pensioners did not claim the MIG, about one third did not claim council tax rebates, and a tenth of those entitled to housing benefit did not claim.
1.7 The Government has said that it wants to make it much easier for pensioners to claim the Pension Credit. For example, it has already been announced that entitlement will be worked out when an individual retires in the same way as the basic state pension. The NAO makes a number of constructive recommendations to improve take up of all means tested benefits for pensioners through the new Pension Service, working with others such as local authorities, including setting 'realistic and stretching targets for the take up of Pension Credit'. The TUC believes that to maximise take-up it is essential that pensioners come to regard Pension Credit as a basic right. It is essential to create an environment where the Pension Credit is seen as a different form of state support closer to a national insurance benefit than a conventional means tested benefit.
1.8 It remains the TUC’s view that final salary occupational pension schemes are the best way to save for retirement and the surest way of guaranteeing a decent income following a lifetime at work. The TUC is concerned about the number of employers closing their final salary schemes and opting for cheaper money purchase schemes. The UK’s pensions system has always rested on the notion that the state, employers and individuals should share responsibility for retirement provision, and we are pleased that the government has recognised this in the Pensions Green Paper.
1.9 The principal reason for the closure of final salary schemes is that employers are looking to reduce costs. A range of arguments has been used to justify employers’ behaviour including longer life expectancies, regulatory and tax changes and declining stock market performance. In addition many employers are claiming that the volume and complexity of regulation is driving the shift to defined contribution (DC) schemes. While all these may have had some impact, in most cases they are simply being used as excuses. The truth is that employers are now being required to contribute to occupational pensions after a prolonged period where soaring equity prices allowed them to take long contribution holidays.
1.10 Defined contribution (DC) schemes generally provide a lower level of benefits than final salary schemes - largely because of the lower employer contribution; DC schemes also transfer the risk of saving for retirement wholly on to the individual. If more workers are relying upon DC schemes for their retirement income then it is certain the state will bear a greater burden by paying out higher volumes of Pension Credit in the future. The TUC would like to see the trend away from final salary schemes halted and reversed. Making individuals exclusively responsible for covering the shortfall is simply unrealistic.
1.11 The case for compulsory employer contributions to occupational pensions is compelling. In the TUC’s view it is essential that a statutory obligation be imposed on employers to contribute to their workers’ pensions - a compulsory employer contribution, set at 10 per cent. This would be reinforced by an improved basic state pension, the Pension Credit and the State Second Pension and together will help re-build the social contract on which a successful settlement must rest.
1.12 The TUC recognises that to introduce compulsion is a significant intervention in the labour market at least on a par with the National Minimum Wage and arguably even more important, because it would affect all but the lowest paid workers and their employers. We therefore recommend a phasing in of compulsory contributions over a reasonable period of time from 4 to 10 per cent. The Australian experience in the 1990s may be relevant - the then Labour Government set a timetable for compulsory contributions to rise from 3 to 9 per cent and this was delivered despite the subsequent change in administration. Pension policy is inevitably long term, with full results often only visible in 30 to 40 years time. We need to generate a durable consensus based on agreement between the social partners, the Government and other political parties.
1.13 The Government has recognised that much more needs to be done to enable individuals to retire on a decent income. The proposals contained within the Pensions Green Paper go some way to addressing the issues surrounding the complex pensions system in the UK, and making it easier for employers to provide good quality pension schemes for all workers. The Pensions Green Paper has identified some of the key problems facing the UK pensions system.
1.14 The TUC welcomes the establishment of an independent commission to assess the UK’s pensions arrangements and make recommendations to government.
Section Four : Informed choice in pensions - choices for individuals
1.15 The TUC welcomes plans by the government to simplify the taxation of pension schemes, enabling individuals to understand their pension choices. We agree that the current tax rules act as a barrier to saving, and create confusion amongst individuals wanting to save for retirement.
Green Paper Proposal: Simplify the taxation of pension schemes radically so that all pension schemes are covered by a single set of simple rules
1.16 The proposals contained in the Pensions Green Paper on simplifying the pensions tax regime are welcomed by the TUC. There are currently eight different tax regimes for pensions and within each, there are further rules covering levels of benefit and contribution rates. Any attempt to radically simplify the complex system that has developed is welcome.
1.17 Proposals for a single, lifetime limit of £1.4 million on how much someone can save in a tax privileged pension are broadly welcome, though the limit should be indexed to increases in national average earnings. It is also welcome that the government propose to remove the 15% limit on earnings that can be contributed to a pension scheme in any one year. The proposals for a single lifetime limit for employees and employer’s contributions will enable individuals to enjoy greater flexibility in how they save for retirement.
1.18 The TUC would like further clarification on the proposed annual limit of £200k, again this sounds very high, and should not have too much impact on many individuals in normal circumstances, however it will have an impact on the ability of employers to pay redundancy compensation to the over 50’s through their pension scheme - a well established practice in many companies. The TUC believe that redundancy and ill-health payments should be excluded from this proposed annual limit.
1.19 We are concerned that tax simplification does not offer any real benefits to the low paid, and believe the proposals may disproportionately benefit the well paid.
1.20 We welcome the proposal to increase flexibility on how people move from work to retirement; especially allowing individuals to reduce their working hours later in life and supplement their income with benefits accrued in their pension, this will remove some of the difficulties experienced when individuals face full retirement.
1.21 The TUC is strongly opposed to any increase in the minimum age, at which an individual can draw a pension from 50 to 55. Many scheme members are regularly faced with being 'forced out' in their early 50’s in the public and private sector and increasing the age from which they can draw their pension will force individuals on to state benefits until they are able to draw on their pensions. Whilst we recognize that people are living longer we do not believe that increasing the minimum age at which individuals can draw a pension will remove any complexity in the current pensions tax, or reduce compliance costs.
Green Paper Proposal: Improve financial education and awareness by, in particular, continuing its publicity campaign and sending targeted information to people at key points in their lives
1.22 The TUC welcomes the measures in the Green Paper aimed at increasing people’s awareness of their need to make pension provision and their awareness of their pension entitlements. We welcome the proposals to establish a web based financial education package, however many individuals do not have access to the Internet and will not benefit from this. The TUC and its affiliated unions have put considerable efforts into pensions education and awareness in recent years; the TUC’s worksmart.org.uk website is just one such example. Since its launch in September 2002 to date the website has had 73,000 hits, further details on the TUC’s worksmart.org.uk are given in section 4, page 41.
Green Paper Proposal: rebrand tax relief on individuals’ contributions to personal and stakeholder pensions to demonstrate the generous incentives that their reliefs provide
1.23 The TUC understands the reasoning behind this proposal but is not convinced that it will deliver any significant increase in savings.
1.24 If an individual is deciding to start saving into a personal or stakeholder pension it is unlikely that they are doing so because of the tax relief available. Anecdotal evidence suggests this has very little affect on individual decision-making at present. It addition simply advertising an element that already exists to new savers seems unlikely to create much enthusiasm to save. And if individuals buy the product through an adviser it is highly likely that an adviser will highlight the tax reliefs in any case.
1.25 In terms of stakeholder or group personal pension schemes offered by employers we see even less merit in the suggestion. The TUC is of the opinion that by far the greatest encouragement to voluntary saving into such schemes is the provision of a decent contribution by the employer. This is confirmed by both take-up within stakeholder schemes that have an employer contribution to those that do not, and by research into the 401(k) market in the US. The TUC is convinced that the existence or otherwise of an employer contribution has a much greater impact on individuals’ attitudes to saving than highlighting an existing facet of pension plans.
1.26 In short the TUC is not opposed to the proposition in principle but remains unconvinced it will have a significant impact.
Green Paper Proposal: extend information tailored to individual circumstances, notably combined pension forecasts from employers and pension providers, and automatically issue state pension forecasts to self employed people, and people who are not members of private pension schemes
1.27 More personalised information, sent direct to individuals is essential if people are to have a clearer picture of how much they will receive when they retire. Following the problems with widows SERPS, the TUC strongly recommends that the government ensure any information supplied to working people about their pension rights is accurate.
1.28 The TUC welcomes the plans to have a clear first port of call for answers to basic questions, access to general information and help for individuals navigating their way through to more specialist help, and whilst the TUC supports the Green Paper proposals to provide information through a number of vehicles, it may inadvertently exclude those individuals who need the information the most
1.29 Combined Benefit statements launch in October 2001, expanding the programme on the basis of voluntary participation, the TUC supported the introduction of Combined Benefit statements, and we are please that the government has extended the programme to include more employers. Providing individuals with more personalised information is essential if people are to have a clearer picture of how much money they will receive when they retire.
Green Paper Proposal: simplify savings products, and ask for views on offering the self-employed the right to opt in to the State Second Pension
1.30 The TUCbroadly supports the Green Paper proposals on the need for simpler savings choices, and we have no objections against allowing the Self-employed the chance to contribute to the State Second Pension.
Section Five
Pensions and the Workplace
1.31 The TUC supports the view expressed in the Green Paper that the workplace plays a vital part in pension provision. It is true that good employers recognise the importance of good pension schemes, and we commend those employers that have sustained their pensions promise.
1.32 In the past employers recognised that they had a responsibility to help workers save for retirement. Thousands of UK companies offered high quality occupational schemes offering retirement benefits related to final salary - so-called defined benefit (DB) schemes. There was an understanding that making provision for retirement was a shared responsibility between the state, individuals and their employer. This social contract is now under threat with the state’s retreat from pensions provision being matched by employers’ headlong rush away from DB pensions.
1.33 In 1991 there were 5.6 million private sector employee members of final salary schemes according to Government Actuary’s Department figures. Projecting the decline forward the figure may have fallen to 3.8 million in 2001 [2] The real decline may be even higher given the recent acceleration in the closure of occupational pension schemes.
1.34 In most cases employers are replacing final salary schemes with defined contribution (DC) plans whether occupational DC, group personal pensions or stakeholder. In a few instances (Tesco, Nationwide, Pensions Trust) different benefit approaches have been adopted, but if current trends continue the UK is heading towards a system in which DC dominates.
1.35 The net effect has been a transfer of risk back to employees on modest incomes. In final salary pensions the employer guarantees a certain level of retirement income to the employee no matter what the investment performance of the fund where the money has been invested. In DC schemes the risk rests with employees since the value of their pensions depends largely on investment performance. Where employers do contribute they generally pay less into a DC pension than they do into a DB pension.
1.36 It needs to be clearly stated that employers contribute much less to defined contribution schemes than to defined benefit schemes. Too often the argument is made that DC schemes can be as good as DB schemes if a similar level of contribution is paid in. The reality of occupational pension provision in the UK is that with a few exceptions employers do not pay an adequate contribution into DC schemes. Employers almost without fail use the opportunity of moving from DB to DC provision to cut back their contributions.
1.37 In fact employers typically pay almost two thirds less into a DC scheme than a DB one. According to the NAPF annual survey the average long-term employer contribution to a final salary scheme is 15.45%, in money purchase schemes the figure is just 6% [3] . Feedback from the TUC Member Trustees Network suggests that these figures may hide some of the worst examples. In one case a medium-sized employer shut the DB scheme into which it was paying 14% of salary and opened a DC scheme into which it paid 2%.
1.38 Whilst the TUC recognise that DC schemes with a decent employer contribution can provide some workers with a decent pension in retirement, it remains the case that unless employers contribute significantly more to DC schemes they will not provide workers with adequate incomes in retirement.
1.39 Apart from this being an inequitable situation the TUC believes that the action currently being taken by employers will have ramifications in the future. In effect employers are creating two-tier workforces within companies - pension haves and have-nots. Some employees will have defined benefit pensions whilst others, doing the same job but taken on later, will have DC pensions into which the employer pays very little. This will create tension between newer and more experienced employers and may make it more difficult for the employer to recruit and retain high quality staff.
1.40 The low level of contributions also lead the TUC to question the assertion in the Green Paper that 'defined contribution schemes tend to be better for people who move jobs more frequently'. Put simply it does not make sense to suggest that a pension into which an employer typically pays much less is a good deal for employees. It is assumed that DC schemes are supposedly better for frequent movers because there is no erosion of accrued benefits in transfer, but this cannot outweigh the much lower contributions into DC schemes.
1.41 It is also worth addressing the argument about the suitability of final salary schemes in the modern labour market. It is certainly true that labour mobility has increased, but only for certain groups of workers. A report by the government-sponsored Pension Provision Group found that the rate at which under-25s change jobs has increased rapidly since the 1970s. But for those workers aged between 25 and 49 the length of time spent with the same employer is virtually unchanged [4] .
1.42 A separate study on pensions and the labour market, commissioned by the NAPF, reached similar conclusions and even highlighted a slight increase in average job tenure between the mid-80s and 1995 [5] .
1.43 It concluded: 'In spite of all the rhetoric and contrary to popular perception the UK labour market displays a remarkable degree of stability in the attachment of employees to a particular employer. The job for life has never existed, but pension schemes have functioned effectively with people building up seven or eight year’s worth of credit in a number of schemes. The modern labour market contains nothing that would lead that to change.'
1.44 The TUC is also sceptical of the need for employers to change pension provision to meet the needs of frequent movers - surely this is counter-intuitive for organisations looking to recruit and retain the best staff.
1.45 We believe that there also needs be recognition that to some extent employers now complaining of the burdens of running occupational schemes have brought problems on themselves. Many employers running final salary schemes have used the surplus generated in their fund by investment returns to reduce or stop altogether the contributions they pay in.
1.46 According to Inland Revenue statistics between 1987-88 and 2000-2001 employers took contributions holidays or reductions with a value of £18.57bn. But in the same period just £1.13bn of surplus was used to reduce employee contributions or give employees a contribution holiday [6] . This means employers saved around an average £4,000 per employee scheme member.
1.47 It is striking how contributions holidays typically favoured employers over employees. Overall just over 94% of surplus was used to either reduce employers’ contributions or give them a contribution holiday. Less than 6% went on employee contribution reductions, a ratio of about 16:1. This seems particularly inequitable when the shared responsibility of employers and employees for funding final salary schemes is considered. Based on NAPF estimates of long-term contributions to final salary schemes, employers account for 62.65% of the total contribution, with employees making up the remaining 37.35% [7] . In other words the split is roughly 2:1. It would seem fair that contributions reductions be split in similar proportions rather than the current 16:1 ratio.
1.48 At the time when employers took these contributions holidays many argued that it was justified on the basis that they had to shoulder investment risk and that they would pay up if returns fell away. What we are now witnessing is that when many employers are indeed required to meet their obligations they instead choose to close their pension scheme.
1.49 The TUC regrets that the Government has decided not to address further the issue of scheme surpluses. Although the issues are complex, and in some respects will depend on the rules and funding mechanisms of each scheme, nevertheless the issue continues to give concern to scheme members. Nor has the concern been lessened by the fact that most schemes are now in deficit rather than surplus: scheme members are angered by the fact that so many employers who were happy to take advantage of contribution holidays or even refunds in the past, are not similarly prepared to take responsibility for making good scheme deficits. We would want the government to give further consideration to this point.
1.50 The TUC’s view is that the evidence of recent years shows that the UK’s voluntary system may no longer be sustainable. Actions of employers in shutting DB schemes, and contributing too little to DC schemes show that if voluntarism continues we will simply witness huge cutbacks in the amount employees can expect from occupational schemes. And the evidence from employer-sponsored stakeholder pensions is that individuals will not carry the burden for pension provision on their own.
1.51 We believe that the only way that we can guarantee that private pension provision fills the gap left by the retreat of the state is if there is compulsion on employers to contribute to workers pensions. As such while we support elements of the recommendations in Chapter 4 to simplify and, enhance provision and improve information we believe that taken together these measurers fall far short of the urgent changes needed in the UK system.
Green Paper Proposal: introduce more flexible rules for scheme funding to reduce short-term burdens on schemes
1.52 The TUC continues to support the principle of replacing the current MFR with a long term, scheme specific funding standard, within the context of a regime of transparency and disclosure. The TUC has consistently pointed-out the shortcomings of the MFR and, in particular, the problem that the one test is trying to meet two requirements and in practice has failed to achieve either. Thus, it is failing to either:
- ensure that the employer pays sufficient contributions to meet the pension scheme’s long term commitments; or
- protect scheme members, in the short term, from the collapse or insolvency of their employer
1.53 Given this difficulty the TUC continues to believe that there should be a package of measures to give members a guarantee that their pension scheme will both meet its long-term commitments and provide security in the short-term in the event of their employer becoming insolvent. For the first objective the TUC considers that a scheme specific solvency standard as proposed by the Government could be acceptable, provided it met certain conditions.
1.54 For the second objective, i.e. protecting members when a Scheme is wound-up prematurely, the TUC considers that completely new arrangements are required, involving both a central discontinuation fund and insolvency insurance. It needs to be emphasised that the funding standard is irrelevant in this context as even a scheme that is fully funded on a long-term basis can still be in deficit if it has to be wound-up prematurely.
A Scheme Specific Funding Standard
1.55 In regard to the concept of the new funding standard, we must emphasise what should be meant in practice by a 'scheme specific' standard and, in doing so, make clear what is not meant by such a standard. In particular, we wish to warn that the requirement for a 'scheme specific' standard should not in practice mean either:
- an 'employer specific' standard; or
- an 'actuary specific' standard.
1.56 Employer Specific: The TUC is strongly opposed to any funding standard that is related to the circumstances of the employer. If an employer chooses to offer a defined benefit pension scheme to its employees then it has to accept certain legally enforced minimum standards, including such matters as scheme governance, disclosure and, not least, funding. In other words, scheme members are entitled to expect that the assets will be there, when needed, to pay benefits in accordance with the rules. This requires a minimum level of contributions from the employer that is independent of the financial state of the employer. We do not accept that an employer should be allowed, for whatever reason, to underfund its pension commitments. Ultimately, members of occupational pension schemes should not be left in the position of wondering whether or not they will actually receive their pension benefits as set out in the scheme rules.
1.57 There are also practical objections to having a scheme specific funding standard that depends on the status of the employer. Thus, we do not believe that the scheme actuary is in any position to assess the financial stability of the sponsoring employer, a task which would, in any event, place them in a totally invidious position. Furthermore, the logic of such an approach is that the standard would lead to a higher contribution rate for employers who are having financial difficulties. We do not believe that this is actually helpful to the members, who may also be concerned about their employment. We consider, instead, that some form of mutual insurance should be required to cover the possibility of employers being financially unsound, as discussed below in relation to scheme wind-ups.
1.58 Actuary Specific: The TUC is also strongly opposed to any standard which permits too wide a discretion on the part of the scheme actuary. In practice, therefore, the scheme specific approach must be underpinned by rigorous professional standards that clearly set parameters for the general, i.e. non scheme specific, economic assumptions, within which scheme actuaries will be required to work. We would also expect professional standards to lay down parameters for the demographic assumptions where it is not possible to derive scheme specific figures, for example because of the scheme’s size. We are open, at this stage, to a decision on whether such standards will require statutory enforcement.
1.59 While rejecting employer and actuary specific standards the TUC accepts that there are certain elements in a funding basis where the meaning of a scheme specific basis is obvious, particularly in regard to the demographic assumptions such as the rates of mortality, ill-health and withdrawal. However, it is less clear what is scheme specific about the key financial assumptions, in particular the anticipated return on types of investment and inflation. The Government should be aware that there is currently a significant debate within the actuarial profession about the valuation of scheme pension liabilities and, in particular, the extent to which these should be discounted at rates that reflect the individual scheme’s investments. But even if it is accepted that discount rate depends on the nature of the fund’s assets, it should still be the case that given the mix of each scheme’s assets we would expect broadly similar returns to be achieved.
1.60 We therefore caution strongly against any approach that would allow different schemes to expect, in effect, different returns on the same type of investment. Neither is there any logic in a basis which assumes that one fund is able to achieve higher returns on a particular type of investment, for example on its equities, than any other fund. Any standard must therefore be based on two principles:
- first, the nature of a scheme’s liabilities should determine what classes of assets are looked to determine the value of those liabilities; and
- secondly, it should not be open to a scheme to expect higher returns on a particular class of asset than that expected by any other scheme.
1.61 Given this approach to a scheme specific standard and the relative lack of discretion it implies for individual actuaries, the TUC is strongly of the view that clear professional guidance needs to be laid down by the actuarial profession. This guidance would, in effect, establish a common funding standard from which schemes would only depart in limited and specified circumstances as laid down in the professional guidance. Any margins of discretion would need to be closely defined, imposing a discipline on the actuary and empowering the trustees, whilst enlarging everyone's understanding.
Statement of Funding Principles
1.62 The TUC welcomes the general principle of placing a requirement on scheme trustees to prepare and communicate to members a Statement of Funding Principles. However, we do envisage difficulties arising in practice from what is proposed in the Green Paper, both from the need to obtain the agreement of the employer and from the lack of real sanctions that are available to the trustees if the employer fails to reach agreement. It is difficult to envisage trustees seeking any other target than full funding in accordance with professional standards, with the only significant scope for discretion being the period over which deficiencies and/or surpluses are to be eliminated. It is also clear that if an employer offers pension benefits that it assumes a responsibility to fund that commitment. In practice, however, under the Government’s proposals, it will be possible for an employer to effectively coerce the trustees into setting a lower, inadequate, funding policy by threatening to discontinue the scheme.
1.63 This is exactly what many employers are doing at present, where the threat of scheme discontinuance is enough to persuade trustees to agree to rule changes that reduce members’ future benefits. We therefore consider that allowing the trustees to freeze or wind-up the scheme does not give the trustees any real power at all. We also consider that, in any event, the Statement of Funding Principles should meet a minimum standard, i.e. even where this does not achieve the employer’s agreement. This should be in accordance with the actuarial standard for scheme specific valuations that is proposed above. We see no case for allowing employers to make pension promises and then avoid the consequences by not putting enough money into the scheme to pay for them. This does leave open for discussion the issue of the period over which deficits or surpluses should be eliminated. The TUC’s preference would be for a requirement that deficits should be eliminated over a period no longer than the expected average future service lifetime of the current membership. We would also support a ban on contribution holidays and refunds except after full consultation and as part of a negotiated settlement with the relevant trade unions.
Transparency & Disclosure
1.64 We are disappointed that there has been no further reference to the proposal in Paul Myners’s interim report for a requirement for schemes to submit a regular report to Opra on their financial situation and for such reports to be subject to public inspection. The TUC would also support his suggestion that in certain circumstances, for example when requisitioned by a minimum number of members, there should be an independent review of a scheme’s finances.
Schedule of Contributions
1.65 The TUC fully supports the proposed requirement on each employer to commit themselves to paying contributions in accordance with a Schedule of Contributions that has been agreed with the Trustees. This is clearly a necessary element in an approach based on a long-term funding standard, in line with our original proposals for the replacement of the MFR. However, there are a number of elements that need to be clarified before the requirement can be regarded as fully satisfactory. In particular:
- there is the need for a standard against which the adequacy of the Schedule can be measured;
- there needs to be some form of enforcement, in addition to a system of monitoring by the new regulatory body;
- the legislation will need to be clear about what is meant by 'adequate'; and
- some discretion might appropriately be built into the framework to avoid discontinuance being precipitated prematurely, for example over time limits, involving both the trustees and OPRA and regulated by guidance
1.66 The Green Paper proposes that a new regulator should be responsible for monitoring these requirements. To do so it will clearly need to be given the additional resources it will require to do an effective job. It should also be given the power to levy sanctions on employers that fail to carry out their obligations under plan.
Green Paper Proposal: undertake a major simplification and restructuring of the contracted-out regulations
1.67 The TUC will generally support any proposals that would simplify the contracting-out process and ease the administrative burden on schemes that choose to contract-out. However, this must be on the condition that the members of contracted-out schemes do not lose out in any way or even face an increased risk that they will do so. It must be remembered that contracting-out is a voluntary act on the part of the employer, over which the members have no control other than the right to be consulted. If employers regard contracting-out as being too burdensome they have the simple option of leaving their employees in the State scheme. The TUC has no 'a-priori' preference for or against contracting-out and we see no reason why the legislative requirements should be tilted in favour of one approach rather than the other.
1.68 It should also be remembered that all those employers who are currently contracted-out chose to do so in accordance with the contracting-out rules that were current at the time and in full awareness of what those rules entailed. In doing so they accepted all the relevant obligations. It would be grossly unfair on individual members if the rules were to be changed subsequently and some of them were to end up with lower pensions as a result. The contracting-out requirements are already much simpler than they were in the past, yet the great majority of employers who are currently contracted-out happily signed up to them. The TUC has consistently opposed the reduction in the standards set for schemes that contract-out and it certainly does not wish to see yet a further reduction. These are not just simple administrative amendments that are being considered but changes that will have a direct impact on individual benefits.
1.69 It is worth recalling that the original intention of contracting-out was that it should be limited to 'good' occupational pension schemes with a guarantee that no individual would end up with less than they would have done had they remained in the State Earnings Related Pension Scheme (SERPS). We have already moved a long way from that, with money purchase contracting out and an acceptance in defined benefit schemes that up to 10 per cent of members could end up being worse off. We would be strongly opposed to going any further. We certainly cannot see any reason why the Government should give employers the power to take away part of an employee’s entitlement to a State pension and offer them something known to be inferior instead. What possible justification can there be for this, particularly where the member has no choice in the matter?
1.70 The TUC’s general view, therefore, is that the contracting-out requirements need to be tightened up, rather than relaxed. In particular, picking up the point made in the Green Paper, we see no reason why such changes would lead to any significant increase in the coverage of or contributions to occupational pension schemes. This would only come about if there were numbers of employers actively considering the contracting-out option but deterred from doing so by the current contracting-out arrangements. We are not aware of any evidence that this is the case.
1.71 What does seem to be the main factor for employers in determining whether or not they contract-out is the level of the contracting-out rebate. It might therefore be worth reiterating the TUC’s support for the existing level of rebate for contracted-out salary related scheme (COSRs), despite complaints from some in the pensions industry that it is too low. The rebate has been determined by the Government on the basis of advice from the Government Actuary which is reasonably cautious, including some specific margins. The figure is determined periodically on a basis which is considered to be appropriate at the time and will then apply over the appropriate period. We do not believe that it would be in anyone’s interests to keep the rebate under constant review and to see it adjusted in the short-term in response to market movements.
1.72 It should be understood that to offer rebates that are higher than those which are judged on an objective basis by the Government Actuary to be neutral would effectively subsidise members of contracted-out schemes, at the expense of employees who are not contracted-out. It is worth noting the latter group consists, by and large, of lower earners with poorer pension provision. The TUC therefore urges the Government to resist pressure to increases the rebate and to maintain the position that it should be established on an objective basis, maintaining broad neutrality between those who are and those who are not contracted-out.
1.73 Against this background our view on the Government’s specific proposals relating to contracting-out are set out below.
Survivors’ benefits and indexation
1.74 We strongly support the Government’s conclusion that removing the requirement to provide survivors’ benefits would have a disproportionate impact on women and that no change should be made. We are also against any suggestion of removing the requirement for compulsory indexation, even if this is limited to larger pensions. We find this suggestion particularly odd in the context of simplification, as it will make administration of schemes even more complex. The essential point is that State benefits, including the State Second Pension (S2P), are index-linked, so the occupational benefits that replace them should be index-linked as well. The TUC is opposed to the removal of the general LPI requirement and can see no argument why contracted-out benefits should be treated any differently.
The Reference Scheme Test
1.75 For all the reasons explained above, the TUC is strongly opposed to any changes that would make the reference scheme test (RST) easier to meet, if this meant any increase in the likelihood that members would end up with worse benefits. Of course it would be possible to simplify the RST substantially by raising the standards required for schemes that contract-out and this is the direction in which we would like the Government to go. However, we do support the general idea of enabling employers offering other types of benefit structure to contract-out but only if this does not lead to a lowering of standards.
1.76 Paragraph 47 of the Technical Paper sets out a number of specific changes that could be made to the RST. Of these the TUC is strongly opposed to the Government’s suggestion of a reduction in the minimum accrual rate from 1/80th to 1/100th. The Green Paper suggests that this would 'reduce funding pressures' or, to put it another way, 'reduce members’ potential benefits'. This is completely unacceptable.
1.77 Of the other possible changes to the RST the TUC is not against changes that make specific provision for ‘career average’ schemes, although this would obviously make the rules more rather than less complex. However, we must point out that career average schemes vary widely in their quality and it would be necessary to set appropriate standards.
1.78 In particular, we do not regard that a career average based on re-valuation in line with prices up to five per cent per annum should be regarded as adequate for contracting-out purposes. A benefit based on 1/80ths of average pay which is revalued on such an 'LPI' basis would for large numbers of members fall well short of a benefit based on 1/80ths of final pay, particularly for long service members. As explained above, we are strongly opposed to any change that would effectively allow employers to offer benefits that are significantly lower than those required at present.
1.79 It should be noted that S2P is itself a type of career average scheme, which suggests the RST for career average schemes that are to be allowed to replace S2P benefits should require revaluation in service on the same basis, i.e. in line with national average earnings. There are existing career average schemes where the revaluation is in this basis so it is clear that there are no practical objections. Any other basis would either lead to benefits that were much too small or require a substantially higher accrual rate than allowed for final pay schemes.
1.80 The TUC does not believe that these changes to the RST, either in part as we find acceptable or in full, would have any significant effect on occupational pension scheme coverage. There is simply no evidence that there are significant numbers of employers which already have or are considering defined benefit schemes that have been deterred from contracting-out because of the complexities of the existing RST. Those employers with defined benefit schemes who have not contracted-out have invariably not done so on financial grounds or by an assessment of the risks involved and changes along the lines proposed are likely to have a marginal effect, at best.
Simplification of Guaranteed Minimum Pensions
1.81 The TUC is in favour of any proposals to reduce the administrative burdens that undoubtedly fall on schemes because of GMPs but we are strongly against any retrospective changes that mean members ending up with worse benefits than they are entitled to at present. Whatever the current complexities, employers and scheme administrators freely entered into an agreement to pay what was required under the legislation and the regulations and it would be grossly unfair on members who lose out if the rules were now to be changed. The TUC would, of course, be happy to participate with other pensions experts in considering possible simplifications that offered full protection for members’ accrued rights. The Green Paper uses the term 'appropriate protection for members' but, as far as we are concerned, the only appropriate protection is that which guarantees that no one will be worse off.
Restrictions on how and when benefits can be taken
1.82 The TUC is broadly in favour of relaxing the restrictions on when and how contracted-out benefits can be taken. It should be appreciated, however, that in practice this will almost always mean that individuals will tend to get lower pensions, either because they come into payment earlier or they are commuted in part or in whole. The consequence is that they are likely to make a greater call on means-tested State benefits. Against this background, the TUC is in favour of allowing individuals to take pensions earlier than they would otherwise have done and, in cases of triviality, to convert them into a lump sum.
Green Paper Proposal: give schemes much greater flexibility in how they comply with the regulations
1.83 We welcome the government’s approach in this area. The broad principles that pensions legislation should be consolidated and that the level of prescription should be based on the level of risk to scheme members are a sound basis for reform. We would of course seek to ensure that this second principle does not unduly weaken protection for members but the principle is sound.
1.84 We also accept the principle that schemes have more flexibility to manage themselves in a more efficient and effective way that reflects and supports the needs of the sponsoring employer. The position of the TUC and affiliates during the current crisis has been to try and work with employers to enable the continuation of good quality pension provision. We must sound a note of caution however that this should not be carried out is such a way that enables employers to renege on commitments to employees, or obstruct the clear intent of legislation as it stands.
On the specific Green Paper Proposals:
Modifying accrued rights
1.85 As outlined in the technical paper, Section 67 of the Pensions Act 1995 prevents changes being made that would reduce a member’s accrued rights without the member’s consent. The Pickering Report made recommendations to change section 67 to allow employers to change fundamentally the terms of the pension scheme in respect of member’s past service. The TUC welcomes the Green Papers rejection of the proposals contained in the Pickering report, and whilst we recognise that Section 67 is extremely restrictive, any relaxation would have to involve extensive consultation and negotiation with scheme members. We do not support the view that an employer should be able unilaterally to alter an accrued pension. There are already rules in place which allow trustees to seek members consent. We would welcome further discussions with government on any simplification of the arrangements under which schemes are restricted from modifying accrued rights.
Reduce prescription in MNT selection process
1.86 The TUC believes that the narrow focus on an outcome of at least one third of trustees to be MNTs is not sufficient and that member confidence in the trustees and in the process of selecting them must also be a consideration. Flexibility is desirable but there needs to be a check on its reasonable bounds.
1.87 In addition we believe it is desirable to eliminate any employer role in selecting MNTs and is essential to build in some element of member consultation or approval into any process. In the case of MNTs complexity does not really generate significant costs, as advice is readily available. Savings would be the result of removing the requirement to seek approval/consult the members, which is a principal that must be retained.
1.88 Overall the TUC believes that there needs to be a more flexible system which contains a little more guidance (for example no employer role in selection, pensioners to be represented if they comprise a substantial element of the membership) but retains an element of member approval or consultation to put a check on manipulation of flexibility.
1.89 We also continue to believe that it is inadequate that only a third of trustees are member-nominated, particularly given member concerns about scheme security and the level of benefits. We therefore urge the government to require all schemes to have at least half of their trustees nominated by members.
Improve Internal Dispute Resolution procedures
1.90 The IDRP is an important process that allows members, prospective members and beneficiaries a process for resolving complaints. We believe that the requirements should be simplified to ensure that members’ complaints can be resolved with greater efficiency, although clear guidance must be provided for trustees.
1.91 We support the proposals that all schemes must have a published formal dispute procedure, however, we oppose removal of the two-stage process. Complainants should have access to the trustees and managers as part of the process. It is the TUC view that time limits are set and we feel that six months is too long, three months would be more suitable.
Extend pension provision and increase take-up
1.92 The TUC repeats its view that the only sure-fire way to ensure the provision and coverage of pensions is to increase the element of compulsion in the system. However in the absence of an immediate move to greater compulsion we have comments on the proposals.
Immediate vesting
1.93 The TUC backs wholeheartedly this recommendation. We believe that at a stroke this will help people start building up pensions entitlement as soon as they start a new job and that this will help the government achieve its objective of individuals playing a greater role in their own retirement provision. The TUC is convinced that employees should start building up pension rights from day one. Too often in the past employees have been denied access to a pension scheme for a period of their employment, and then when eligible not joined. This policy will put right that inefficiency in the system.
Transfer de minimis amounts to a stakeholder
1.94 The TUC believes the proposal for immediate vesting is a significant step forward. With this in mind we accept that there needs to be recognition of the role played by the employer. Therefore the proposal to transfer de minimis amounts to a stakeholder pension as a way of enabling employers to avoid the burden of administering small amounts of benefit is acceptable.
Option to make membership of an employer scheme compulsory
1.95 The TUC fully supports this recommendation. Given the substantial contribution most employers pay into an occupational pension it will almost always be in the best interest of an individual to join such a scheme, and we believe in principle it is right for employees to be compelled to join. These schemes would be required to meet minimum standards set out by the government.
Green Paper Proposal: develop a new pensions regulator whose objectives and resources are focused on protecting the benefits of scheme members
1.96 The TUC supports proposals for a new proactive pensions regulator to be set up alongside the FSA. We believe the new regulator should be able to give support and advice to those seeking to achieve compliance as laid out in the Quinquennial Review of Opra, and provide guidance to trustees, pension professionals and employers on regulatory matters. The TUC would like full consultation in setting out new codes of practise for pension schemes.
1.97 The board of the new regulator should include representatives from the trade union movement, as is currently the case at OPRA.
Green Paper Proposal: take steps to give members greater confidence that, when schemes are wound up, they will get the benefits they were promised
1.98 The TUC considers it essential to have new legislation to provide greater protection than at present for members of defined benefit occupational pension scheme when they are wound-up. The Government has as an objective the extension of private pension provision and the TUC supports this, in so far as it is through the medium of good properly funded occupational pension schemes. But unless something is done to reassure people that they will get their expected benefits from occupational pension schemes, people will lose confidence in such schemes with the result that there will be less coverage, not more. From the TUC’s perspective we consider that when employers provide pension benefits as part of the terms of employment they should take all reasonable steps to ensure that the commitment they have undertaken will be made good.
1.99 What happens to members’ benefits when a pension scheme is wound-up is crucially important to the health of occupational pension schemes. It therefore needs to be emphasised that the adoption of a scheme specific funding standard, even if it goes as far as is possible to meet the objective of ensuring schemes are fully funded, will not eliminate the possibility that a scheme may be under-funded when it is wound-up. This might arise because markets have performed poorly since the last regular valuation or because a series of additional payments designed to eliminate a deficiency have not been completed.
1.100 The first line of protection for members in such a situation is a requirement on employers to meet in full the accrued entitlements of scheme members in the event of a scheme wind-up, in accordance with the solvency standard which has been established. This should ensure that an employer who remains in existence cannot walk away from the scheme, leaving it insufficiently funded to pay the accrued liabilities, and will represent a massive improvement in the present situation, where members’ entitlements only have to be secured up to the scheme’s overall MFR level. Given the gearing effect, whereby pensioner liabilities have to be secured in full, this often means that members with deferred benefits suffer a significant shortfall in their pension.
1.101 Even with this requirement in place there will still be occasions when the employer does not have the resources to make good the deficiency, i.e. the employer is insolvent. There is already limited protection for shortfalls in such circumstances from the Pension Compensation Fund, i.e. where the deficiency is due to dishonesty. But the limited use of the Fund for this purpose over the last few years, at a time when many members of schemes that have been wound-up have lost out significantly, makes it clear that wider measures are required.
1.102 The TUC considers two complementary initiatives are required,
- first, arrangements that offer greater security to members of schemes that are wound-up; and
- secondly, some form of solvency insurance.
1.103 These are dealt with in turn below. We consider that this would constitute a much more satisfactory approach than any change in the priority order for debts on the insolvency of an employer, which may in any event have undesirable side effects in terms of company finance.
Pension Protection Fund
1.104 The first problem to address is that under present arrangements there is no satisfactory way of securing the benefits of final pay schemes when they are wound-up. Either the cash equivalent transfer value (CETV) is paid into a personal pension, in which case the member loses the security of having a defined benefit, or the CETV can be used to purchase a deferred annuity from an insurance company, in which case the benefits will be significantly lower than that under the final salary scheme. So long as a final salary scheme continues, deferred members can expect a defined benefit in accordance with the rules. A mechanism is needed to ensure that this expectation is met even after the scheme has been wound-up.
1.105 As far as securing benefits where the insurance company is concerned, there will always be a problem as they have to meet stiff capital requirements which, in most cases, make the terms very unattractive to the potential policyholders. In addition to this insurance companies are forced to invest the funds they hold to a much larger extent in lower yielding fixed interest investments than is the case for a pension fund. As a result a CETV which is, by definition, adequate to secure a member’s benefits in an ongoing occupational pension scheme, will be inadequate when put into the hands of an insurance company. This means, in turn, that if pension schemes were to be forced to secure discontinuance liabilities on the basis of buying out members’ rights with an insurance company that a significant and ultimately unnecessary additional cost would be imposed on defined benefit occupational schemes.
1.106 One way this higher cost could be avoided is for schemes to continue as closed funds. This means that there are no more new entrants, no more accrual of benefits, and no more contributions, but the scheme continues to operate and to pay the promised benefits. Because it is not operating under insurance company legislation it does not have to meet the expensive capital requirements while at the same time it can retain more of its investments in higher yielding stocks. There are examples where this has been done. For reasons of expense, however, such an option is only open to the larger schemes for so long as they retain a suitable number of members. Even then there are considerable practical obstacles in the way of such an option, including the need to maintain the administrative arrangements and to sustain the appointment of suitable trustees.
1.107 The solution to the problem of the high cost of securing accrued pension rights is effectively to establish a new specialist body which has some of the characteristics of an insurance company but is actually governed by pensions legislation, rather than that which covers insurance companies. This pension fund, which would be known as the Pension Protection Fund (PPF), could take on the defined benefit liabilities of discontinued pension funds of whatever size, keep them invested for longer in higher yielding stocks and spread the costs of administration over a large number of people. In technical terms such a body is known as a central discontinuance fund. It would be open to members, in the normal way, to make transfers out of the PPF into other pension arrangements. It would also be possible for those who wished to do so, to transfer liabilities into the Fund in respect of preserved pensions generally.
1.108 The Pension Protection Fund would operate as if it were a defined benefit occupational pension scheme, enjoying similar tax arrangements and supervisory requirements. It would not be a government body, but like any other pension fund would be run by independent trustees responsible to the membership including an appropriate proportion of those nominated by members. The trustees would make arrangements for the administration of the benefits and the investment of assets. They could arrange for this to be done in-house or by seeking tenders from the pensions industry, as they think appropriate. There is no reason in principle why there should not be more than one PPF, providing they were all of a sufficient size.
1.109 It is important to appreciate that the PPF has nothing to do with the compensation arrangements that apply when a scheme that is wound up has insufficient assets. The PPF’s liabilities would be financed solely by the actual transfer values it received and would be based on the solvency standard laid down in professional guidance. Such payments would, by definition, be sufficient to secure the same preserved benefits to which they were entitled in the ceding scheme. It would, therefore, operate quite separately from the compensation arrangements that were made for making good shortfalls in members’ rights accrued in their previous scheme, which are discussed below. Nevertheless it would provide an appropriate yardstick for measuring the compensation that was due in respect of such shortfalls from the proposed compensation scheme and enable it to be based on the ongoing funding position.
1.110 It is important to appreciate that the PPF will operate as a continuing fund and there will be no need to make any provision for its early termination. As a result there will be little or no likelihood that a deficit could arise of such size that it would not be able to meet its immediate outgoings.
1.111 In addition terms that would be offered would include prudent margins and, hence, will be bettered by the Fund in the medium and longer term. Thus, even if deficits did arise because of short term under-performance, they would only need to be eliminated over a prolonged period during which they may well disappear anyway because of subsequent improved experience.
1.112 Nevertheless a deficit might still arise in the PPF if its experience consistently proved to be worse than that assumed in setting the transfer terms, even if the latter are set on a prudent basis. In this situation there are three options, not necessarily mutually exclusive:
- the Fund could have power to impose a levy on all defined benefit occupational schemes;
- the Government could underwrite any deficit; and
- the Fund could ultimately have the power to reduce benefits across the board, with the countervailing power to give an increase if experience proves to be consistently favourable.
1.113 This present government and its predecessor have consistently opposed the granting of any form of guarantee for such an arrangement, whether from the government itself or from other funds, considering that this would represent an unreasonable burden, whether on taxpayers or employers. We consider, however, that the risks of having to call on a guarantee are limited if the fund is run on a long-term basis and this has to be set against the necessity of restoring confidence in the security of occupational pension schemes. The principle of an industry-wide levy has already been established to fund the Pension Compensation Fund and we see no reason why this should not be extended to cover any possible shortfall in the PPF, with the Government’s role being limited to that of a long-stop.
1.114 It is worth recalling in this context the Government Actuary’s conclusion, in a memorandum addressed to the Pensions Law Review Committee, that:
"... the difficulties of finding satisfactory arrangements for securing the liabilities of discontinued schemes point to the need for some form of [CDF] capable of accepting them. The existence of such a Central Fund would also help continuing schemes to measure, and monitor their discontinuance solvency position, by reference to the terms on which the Central Fund would accept a transfer of liabilities"
Solvency Insurance
1.115 The second problem with protecting members’ benefits on a scheme being wound-up is that in certain circumstances a scheme which is fully funded on a continuing basis may not have sufficient assets to cover its discontinuance liabilities. In normal circumstances this is not a problem as the scheme will continue to pay the benefits as and when they fall due. However, it does become a problem if the scheme has to be wound-up at a time when first, the assets are insufficient to secure the wind-up liabilities and secondly, the employer is insolvent. So long as an employer is solvent we consider it clear that the employer should be under a legal obligation to make good the full amount of any deficit, as calculated in accordance with the solvency standard.
1.116 Recent events have demonstrated that the risk of members of a defined benefit scheme losing out, when their scheme is wound-up, is not theoretical or even remote. This should be unacceptable from the viewpoint of public policy, particularly for a Government which wishes to see greater private pension provision. Given the critical importance of occupational pension schemes for very many people it seems anomalous that other types of investment arrangements are covered by a compensation scheme, not to mention other less crucial areas such as package holidays.
1.117 The TUC is therefore strongly in favour of a compensation scheme for occupational pension schemes to cover any shortfall in the debt that is due from an employer that arises when a scheme has to be wound-up. The amount of such compensation will be the balance payable to the Pension Protection Fund, in addition to what can be recovered from the insolvent employer, calculated in accordance with the solvency standard. As explained above, this will be sufficient to secure member’s defined benefits.
1.118 We envisage that arrangements would adopt a mutual rather than a commercial approach, where defined benefit schemes meet the cost which would be involved. In practical terms it would require a significant extension in the role of the Pensions Compensation Board. Thus, the Board would be given the power to impose a levy on all defined benefit occupational pension schemes which would be sufficient to cover the cost of all unfunded pension liabilities that are assumed by the Pension Protection Board as outlined above.
1.119 Given this general structure the TUC is still open to discussion on the detail of how the arrangement would work. A key issue is whether the commitments should be met through imposing a levy on schemes as and when required or whether the Board should build up a fund which is estimated to be sufficient, in the long term, to cover the likely commitments. Examples of both types of approach are found in other countries and both appear to work in practice. On balance, however, the TUC would favour a funded approach with pension funds paying what is effectively an insurance premium to cover the risk that the sponsoring employer will be insolvent, were the scheme to be wound-up. There are a number of factors which could be taken into account in assessing the appropriate levy so that it reflects the degree of risk which is involved. For example it would be possible to take into account such factors as the employer’s credit-rating, the scheme’s investment policy and its financial status as compared to the solvency standard.
1.120 The main argument we have seen advanced against this approach is that of moral hazard, i.e. schemes and/or employers would behave inappropriately because of the protection offered by the solvency insurance. For example they may adopt reckless investment policies because they would gain from the upside but are protected against possible loss. We do not consider that this is really a problem as it is an argument that could be advanced against any form of insurance. For example, it would be possible to argue that third-party car insurance means that those who drive carefully subsidise those who are careless. But it is still thought that third-party car insurance should be legally compulsory. Just as there is a public interest in ensuring compensation for the innocent victims of car accidents there is a public interest in ensuring that innocent members of defined benefit occupational pension schemes do not end up with less pension than they can reasonably expect.
1.121 However, some safeguards could be built into the insurance scheme to limit exposure to these downside risks. For example:
- to stop members granting themselves substantial benefit improvements just before a scheme is wound-up cover for improvements could be phased in over a number of years, in line with rules for dealing with fund deficits in the funding standard;
- there could be cash limits on the benefits covered by the solvency insurance or on the levels of pensionable earnings that could be taken into account; and
- in line with compensation arrangements in other areas, the cover could be limited to a defined percentage, for example 90 per cent, of the members’ benefits.
1.122 The TUC recognises the need to undertake further detailed work on this proposal, including some modelling of the costs that would be involved. However, we are convinced that a practical scheme can be developed, given sufficient commitment and leadership on the part of the Government.
Priority order on wind-up
1.123 If arrangements along the lines of those set out above are established the issue of the priority order on scheme wind-up will become irrelevant. This is because the scheme will either be fully funded or it will be returned to full funding by the solvency insurance arrangements. Either way, all members will have their benefits secured in full. It is also clear that, without measures along the lines of those outlined above, changes in the priority order that applies on scheme wind-up are about redistributing the pain caused by a funding shortfall and not about reducing the amount of pain overall.
1.124 With regard to the way in which the priority order works at present the TUC’s major concern is with the unfairness that arise when members who, for example, are just a couple of days short of retirement receive a benefit that is significantly less than a colleague’s who happens to be just a few days older and hence was in receipt of a pension on the date wind-up is triggered. What is required, therefore, is for some sort of phasing in of the right to a full buy-out pension as members approach normal retirement date. The TUC there proposes that members with a deferred pension who are within ten years of their normal retirement date should be entitled to a cash equivalent that is based partly on the CETV basis and partly on the full buy-out costs for a deferred annuity. In other words, the entitlement of a member to the full buy-out cost would be phased over the ten years prior to normal retirement date, rather than introduced abruptly at that date.
Technical Paper Proposal: Issues relating to preservation and transfers are not discussed in any detail in the Green Paper itself but some questions are raised in the Technical Paper (Section D)
Preservation
1.125 The Government proposes to retain the current requirements to revalue preserved pensions. However, it suggests that there may be some very complex requirements which may no longer be necessary for example, the rules on money purchase uniform accrual. It would welcome views about any other requirements which are considered particularly burdensome.
Transfers
1.126 In regard to the legislation on transfers the Government believes that there is scope for simplification by consolidating the legislative requirements and removing obsolete provisions and duplication. It would welcome views about any other specific requirements which may be unnecessary or too detailed.
1.127 Comment: Neither the Green Paper itself, nor the Technical Paper explores these issues in any depth and it is therefore difficult to comment in the abstract. The TUC is aware that complaints are made about the complexity of the preservation and transfer requirements but, as far as we are aware, no clear case has been made that demonstrates that the level of protection afforded for members’ rights and reasonable expectations can be reduced without an adverse effect on their benefit entitlements.
1.128 It is easy to forget that before the relevant legislation was introduced in 1978 many members who left schemes before their normal retirement date suffered significant losses for doing so. The need to take action at that time was compelling so those now arguing for a relaxation of the rules must demonstrate that this will not lead to a reduction in standards for early leavers. The TUC continues to believe that in spite of the legislation, early leavers from final salary schemes still lose out, compared to long-service members. Standards therefore need to be tightened rather than relaxed.
1.129 The Technical Paper draws attention to the implications that the proposed replacement for the MFR has for the calculation of minimum cash equivalent transfer values (CETVs). At present the MFR effectively sets a statutory minimum requirement for the calculation of CETVs and its abolition, without any further action, would remove an important element of protection for early leavers wishing to take a transfer. We comment elsewhere on the introduction of a scheme specific funding standard. In this context, however, we think that it is clear that there should be a legal requirement that CETVs should be calculated on a basis which is consistent with whatever funding standard is established.
1.130 This will require, in particular, a strict standard from the actuarial profession which avoids excessive variation between schemes in the amount of the CETV that is payable in respect of similar benefits. There will be a massive loss of confidence in defined benefit schemes if it appears that CETVs vary according to the attitude or the resources of the employer. Members will look for consistency and fairness not only within schemes but between schemes as well. Any variation must be justified by objective criteria related solely to the nature and size of the liabilities.
1.131 In the past it has been considered that the position of members has been afforded some protection by the requirement that CETVs and transfer credits granted in respect of transfer payments received must be calculated on a consistent basis. In practice, however, such protection is relatively limited. First, because many schemes now exercise their right to refuse to accept transfer payments. Often this is supposedly because of concerned about potential liabilities, for example to equalise GMPs, but it does mean that such schemes can calculate CETVs on an overcautious basis without the risk of giving too generous credits. The second reason why protection is limited is that many of those schemes that do accept CETVs only do so on a money purchase basis. As a result this provision provides insufficient assurance that CETVs will be calculated on a fair basis. What is needed instead is a professional standard for the calculation of CETVs in which scheme members can have real confidence.
Green Paper Proposal: The Green Paper invites comments on TUPE
1.132 The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) was designed to safeguard employees’ rights when businesses transfer between employers, however they exclude rights in respect of continuing active membership of an occupational pension scheme. Fundamentally this means that under the current regulations employees lose any rights to future pension benefits.
1.133 The TUC welcomed the government’s success at securing an amendment to the Acquired Rights Directive to protect occupational pensions we are pleased that the government plan to include TUPE. However, we believe that the options in the Green Paper on private-to-private sector transfers fall short of full protection for employees’.
1.134 The Green Paper proposals on TUPE are vague, and we would welcome clarification on many points. On that basis our initial views on the proposals are that option two is unacceptable, and no employee should be transferred to a GPP or stakeholder pension if the y had been members of a final salary scheme. Option one, would be our preferred option though again the information provided is insufficient to make an informed decision on its adequacy to protect members in the case of a TUPE transfer.
1.135 We propose that the new employer provides a pension scheme of equal quality to the member’s old employer. A business transfer must not be an excuse to reduce employee’s pension rights.
Green Paper Proposal: ensure that members are consulted about changes to their pension scheme
1.136 The TUC warmly welcomes the Green Paper proposal that there should be a requirement on all employers to consult their employees or employees’ representatives, or both, before making changes to the pension scheme. However the Green Paper suggests that the government will consider this issue alongside consideration of how to implement the EC information and Consultation Directive, which must be transposed into UK law by March 2005. We believe that employee consultation must be implemented immediately to enable trade unions to ensure that their members’ pensions are protected against employers making detrimental changes to the pension scheme
1.137 To ensure that consultation is meaningful, the TUC recommends that consultation should be with an independent trade union recognised for the purposes of collective bargaining or with representatives elected under the EU Information and Consultation Directive (to be transposed in the UK by 2005). Furthermore, consultation should be ' with a view to reaching agreement', within a specified time period.
1.138 When implementing consultation rights the TUC believes that no employer, regardless of size, should be excluded form the requirements and that sanctions should be in place for non-compliance with the consultation procedure.
Green Paper Proposal: get the active involvement of employers through an employer task force
1.139 The TUC believes that employers have a crucial role to play in pension provision and would like to see their role extended. The TUC welcomes the proposal to establish an employer task force so that examples of good employer practice in pension provision can be shared, we recognise that there are examples of good employer practise in pension provision and we welcome the fact the those employers are keen to share their experiences and best practise. The TUC is pleased that the Green Paper recognises the importance of trade union representation on the task force. The TUC awaits further announcements from the government on the appointments to the Task Group.
Green Paper Proposal: encourage employers who provide pensions to do more to highlight their value and encourage and facilitate all employers to provide better information
1.140 The TUC is pleased that the Green Paper is committed to employees receiving information on a regular basis regarding their occupational pension scheme, and we welcome the proposals to include information about employer pension contributions on wage slips. We agree that the value of a good employer pension scheme should be highlighted to all employees. Employers should engage with trade unions on various ways to improve the information they provide on pensions. The employer task force provides an opportunity to encourage employers to adopt best practise as identified by the task group on informing employees and prospective employees of the pensions offered in the workplace.
1.141 The importance of individuals understanding their pensions option cannot be emphasised enough. In January 2003 the TUC launched the 'pensions calculator' on worksmart.org.uk, employees without an occupational pension are able to work out how much they need to save to guarantee a decent retirement income with the easy-to-use online Pension Calculator. The workSMART Pension Calculator, developed by the FSA and the Association of British Insurers (ABI), is a simple and flexible tool that provides a quick demonstration of how much an individual should save each month to get a decent retirement income. After a visitor to the site enters key factors (e.g., the age they will start saving, how much they might contribute and retirement age) the calculator will display how much retirement income they could receive. A standardised state pension can be taken into account and the weekly income in retirement will be illustrated in today’s money. Users can change their key factors (e.g., to save more, start earlier or retire later) in order to show how they may achieve what they consider to be a decent retirement income. workSMART also features a jargon-free guide to pensions and their pitfalls.
1.142 The proposed FSA information pack for employers to use in communicating with employees should help to ensure that information is clear, and uses non-technical jargon to explain the benefits of their pension schemes.
1.143 The TUC welcomed the introduction of combined pension forecasts, though it should be possible for all pension scheme members to receive such forecasts. One of the problems with the forecasts is that they often confuse individuals rather than enabling them to make better plans for retirement. The government should look at ways of simplifying the information contained on the forecasts so that individuals can use them as an important element in planning for retirement.
Green Paper Proposal: The Government would welcome views on the potential application of the 401k approach to private pension provision in the UK.
1.144 The TUC is disappointed that in seeking views from the industry on other international experiences the government has chosen to limit this solely to that of the US. In Australia much higher levels of pensions coverage have been achieved than in either the US or the UK. It makes little sense therefore to consult on international experiences in raising coverage and restricting responses to those dealing with an approach that has failed (US pensions coverage is no higher than the UK’s), while excluding one that has succeeded.
1.145 Australia phased in compulsory employer contributions up to 9% over ten years and now around 90% of workers have a pension. This compares to only 50% in the UK and US. We therefore urge the government to make genuine international comparisons and explore further the lessons of the Australian.
1.146 The TUC is not convinced that the 401(k) model can or should be applied to pension provision in the UK.
1.147 For one it needs to be recognized that a 401(k) is not a pension scheme. It is a share-ownership vehicle. Some 410(k) plans have diverse share ownership, many do not and instead are largely invested in the sponsoring company’s stock. It seems to make little sense to apply a model of employee share ownership to pension provision.
1.148 But more importantly we believe the Green Paper is mistaken in its belief that 401(k) plans have raised savings levels, and that tax incentives have helped build take-up. The TUC’s has reviewed US research on the 401(k) market and found that since the introduction of the plans there has been no increase in the overall coverage of employer-sponsored savings [8] .
1.149 Despite the introduction of 401(k)s and their rapid rise to prominence the proportion of workers with a non-state pension has remained unchanged for decades. This point is made by numerous US studies. If the success of 401(k)s is to be evaluated in terms of the policy goal of increasing the number of people saving enough for a decent retirement they are quite simply a failure. Coverage is no further forward in the US now than it was in the 1970s. All that has happened is that workers have been transferred from defined benefit pension schemes into higher risk employee share ownership schemes.
1.150 Participation rates in 401(k) plans do not compare favourably with those for pension schemes. In one study by Hewitt Associates [9] in 2001 over a quarter of employees did not join the 401(k) plan offered and the level of participation had declined from a study the firm carried out did two years earlier. Amongst employees who had been with their company less than two years the proportion joining a 401(k) was even lower - just under 46%. As a comparison one UK study found the overall average level of non-participation in DC schemes to be 11%.
1.151 In fact in recent years there may have actually been a fall off in the coverage of 401(k) plans. According to one recent report by Pensions & Investments [10] participation rates have decline 10% since 1999, deferral rates have dropped to 7% from 8.6% and 8% are extremely or very likely to stop making contributions in 2003.
1.152 The one point that might be taken from the 401(k) experience is the importance of employer contributions. One study found that 80% of non-joiners of these share ownership plans would be more encouraged to join if the employer contributed or increased their current contribution. Experience of the stakeholder market in the UK appears to bear this out. A decent employer contribution is the best incentive to save that there is.
1.153 In short we do not believe the 401(k) model of a share ownership scheme can or should be applied to pension provision in the UK.
Green Paper Proposal: better information from employers who do not contribute to pensions
1.154 Whilst we recognise that the government is trying to increase take up of private pensions, research shows that where there is no employer contribution take-up of pensions schemes is low. Policy interventions by successive governments to date to encourage more saving in aggregate have not been an obvious success. Between 1963 and 2002 there was a modest upward trend in the savings ratio, mainly because of high rates of savings in periods of economic uncertainty and rapidly rising unemployment. Over the past five years savings ratios have fallen back to their pre-1973 levels and arguably are not exceptionally low given the current state of the labour market. It appears that the savings ratio in the UK is highly cyclical. This is shown on the chart in appendix one.
1.155 Recent research suggests the apparent reluctance to save more has little to do with the public’s attitudes to saving, which is in general highly favourable. The researchers conclude that 'many of the main factors that underpin low savings levels are not related to attitudes at all, but reflect a number of other issues including low income levels, the complexity that can surround choosing between different financial products, insecurities about the long term future, high house prices and the possibility of tempting fate by planning too far ahead' (Rowlingson and McKay, Buy now, pay later? British Social Attitudes, 19th Report 2002-2003.
1.156 This finding is supported by the data on earnings and pension coverage. If current income is the key influence on an individual’s decisions on savings, it is not surprising to see variations in pension coverage by income.
1.157 According to the New Earnings Survey (NES) pensions coverage varies significantly by level of earnings, both within industries and across the board. Looking at full-time employees earning over £600 per week across all industries, 81 per cent have a pension. Looking at workers earning less than £200 a week coverage falls to just 29.5 per cent. The lowest coverage for the lowest paid full-time employees is in the hotel and restaurant sector, where only 8.7 per cent of women and just 7.8 per cent of men earning under £200 a week have pensions.
1.158 That is why the TUC believes that the only way to ensure that a decent income in retirement is for all employers to be compelled to pay into workers pensions. Evidence shows that pension scheme membership rises massively when the employer makes a contribution. Across the country as a whole only 13 per cent of employees join their employer’s scheme where there is no contribution, compared with 69 per cent where there is a contribution of 5 per cent or more [11] .
1.159 Past problems of mis-selling of some financial products and the recent experience of big stock market falls and their impact on the value of long-term savings schemes is hardly likely to increase people’s confidence in the value of long term saving for retirement. More recent targeted schemes to encourage groups not at present covered by occupational pensions have proved hard to establish with either employers or individuals. Longer term ideas, such as 'baby bonds' and more simplified savings schemes to encourage saving amongst groups who traditionally have saved little, have yet to be proved in practice.
1.160 Moreover, even if these policies do eventually trigger a sustained upward shift in the aggregate savings ratios they may simply reinforce the trend to earlier retirement among better paid workers and potentially open up an even more divisive gap between these workers and those prevented from retiring early by restricting access to pre-retirement state benefits. Workers on high wages might decide they can afford to save more and continue to retire early; while workers on low wages find it even less realistic to save enough to provide for a reasonable pension on retirement and therefore continue to work on.
1.161 Our conclusion from the historical experience and current reality is that compulsion in some form is unavoidable if savings rates are to be improved significantly and the gap between the better off and the rest of the workforce approaching retirement age is not to widen even further.
Section Six : Informed choice in pensions - building trust and understanding in financial services
1.162 The TUC recognises the important role of that the financial services industry plays in the provision of secure incomes in retirement. It is however a highly complex industry and the development of better information and education of financial services products must be welcomed.
Green Paper Proposal; develop generic financial health check products, and financial advice through the workplace
1.163 The TUC supports measures to provide better financial advice through the workplace to enable individuals to make better informed choices about saving for retirement and the products available on the market. Due to the overly complex nature of the UK pensions system choice can quite often be difficult, as identified by the Sandler Review [12] , which states;
1.164 'Even to make basic choices between one kind of savings vehicle and another requires the consumer to have some grasp of investment issues; the differences between cash, equity and bonds for example. Some understanding of product features - the difference between a pension and a unit trust, for example is also necessary'.
1.165 As highlighted in the Sandler report there are a number of advantages to workplace advice. Foremost in the TUC’s view is the fact that it offers the opportunity for accessing financial advice for individuals who might not be willing to visit an IFA either because they cannot find the time or because they are intimidated by financial complexity.
1.166 Secondly it is hoped that due to the collective nature of workplace advice there should be scope for bulk deals. The TUC imagine this would be particularly the case at larger employers. Bigger firms often already use employee benefit consultants for advice on pensions and other benefits. Because such consultants advise a whole range of companies they should be able to put pressure on product providers over costs. However smaller firms are more likely to use an IFA. The government should be aware therefore that the advantages of workplace advice could be significantly skewed towards bigger firms, particularly under the current regime.
1.167 It should be recognized that currently both FSA rules and secondary legislation strongly inhibit what employers can do. Currently only qualified and registered individuals can recommend particular products. If the government is considering that workplace advice might be one way of rolling out the suggested Sandler suite of CAT-marked products then there may be a need for relaxation here.
1.168 The Alliance for Finance, for example, has suggested that there could be a basic grade of financial adviser which could advise on CAT-marked products. The Alliance suggests that such advisers could be located in a range of organizations, such as Citizens Advice Bureau, even the HR departments of companies or within trade unions. The TUC would therefore encourage a wider discussion about the scope for developing workplace advice.
Green Paper Proposal; consult early in 2003 on how to bring stakeholder pensions into the simple product suite proposed by the Sandler review. The FSA will be consulting in parallel on the appropriate sales regime for Sandler products
1.169 The TUC will comment in detail to Government proposals on simple product suite as outlined in Sandler Review due early 2003.
Green Paper Proposal: make the annuities market work better, including the introduction of value protected and limited price annuities
1.170 Current legislation on annuities is complex and the annuities market in the UK is unsatisfactory, women are treated unfairly and individuals find it difficult to shop around for the annuity that will best suit their needs in retirement. It is welcome that the FSA has taken action to encourage people to shop around for the best annuity, and we support the government’s proposals to encourage increased product choice and flexibility for consumers when buying an annuity.
1.171 We support the government’s proposals to encourage a greater variety of annuity products and in particular limited period annuities, value-protected annuities, commutation in respect of small funds up to £10,000 and those with severely reduced life expectancy. We would encourage the government to look at possible ways of standardising annuity quotes making it easier for consumers to compare each offer.
1.172 We are disappointed that the government has decided not to look more closely at unisex annuities. The application of sex based factors means that, all other things being equal, a woman will receive a lower pension than her male equivalent even though contributions from the man and women were the same. This problem is set to increase as more company pension schemes switch from DB to DC. We will be considering this issue in a more detailed paper on women and pensions.
Green Paper Proposal: ensure that pension fund trustees have appropriate investment expertise
1.173 The TUC has hands on experience of the views of trustees through our network of around 1,000 member-nominated trustees. It is clear from feedback via the network that many trustees desire more information and more training on investment issues.
1.174 The TUC believes that it is vitally important for both beneficiaries and the institutional investment industry that pension fund trustees demonstrate a clear understanding of investment issues. We therefore fully accept the proposal in the Myners that trustees should be 'familiar with the issues' where investment of assets is concerned.
1.175 We agree that it would be useful for there to be clearer guidance on want the duty to be 'familiar with the issues' as proposed by Myners actually means, but we believe that this could be quite simply achieved. Trustees should be required to undertake independent training specifically on investment issues.
1.176 However, it is vitally important that training for trustees is developed in a much more independent way in future. At present much training on investment issues is provided by organisations which are not disinterested in obtaining other business from pension fund trustees. The TUC is concerned that if training does not become more independent it may not actually help trustees become better at making the right decisions.
1.177 A member of the TUC trustees’ network recently commented as follows: 'I have attended many courses…but one which gave a more critical analysis of investment professionals would be useful. Advisors and fund managers are constantly changing their jargon when reporting to trustees, as if to confuse or cloud the issue, diverting attention from their performance. They are constantly creating new bases of comparison to further this process.'
1.178 The TUC is also skeptical that without independent training it is unlikely that trustees will be encouraged to become more active investors as envisaged by the Myners review. Trustee training has been noticeably lacking in coverage of issues such as corporate governance, shareholder activism and socially responsible investment - except to effectively discourage such ideas. In the TUC’s view trustees cannot demonstrate appropriate expertise in investment issues if they have not at least been taught about such issues, especially given the increasing importance attached to them. We do not believe therefore that the UK will be able to develop the kind of long-term responsible investment culture the government envisages without changes to trustee training.
1.179 The TUC therefore intends to develop independent resources for pension fund trustees on investment issues. We also intend to work with other organisations to deliver truly independent training.
1.180 Responses from member trustees also suggest that where MNTs are in a minority it is difficult for them to challenge the views of employer trustees and consultants, even when this appears to be in the best interests of beneficiaries. The TUC therefore believes the minimum number of MNTs should be 50% of any trustee board.
Section seven
Extending opportunities for older workers
1.181 The TUC believe that older workers can provide a wealth of knowledge and experience in the workforce, and we support increased flexibility for older workers to move between work and retirement. We welcome the government’s commitment not to raise the state pension age from 65.
1.182 The labour market participation of male older workers has fallen over the past thirty years. Comparing the mid 1970s and late 1990s there have been big falls in the participation of older male workers, slightly offset by modest increases in the participation rates of older women. In the 1990s the fall in labour market participation rates of men between 50 and retirement age started to level off, and there was a significant increase in participation rates among women between 50 and retirement age. There was little change in the share of older workers working beyond state retirement age, with a small fall in men over 65 active in the labour market balanced by a small rise in the share of women over 60. These increases were largely balanced by falling labour market participation among the under 25s, so that the overall labour market participation rate has not changed over the past decade.
LABOUR MARKET PARTICPATION RATES FOR OLDER WORKERS 1992-2002
|
50 to retirement age |
1992 |
2002 |
Change (% points) |
|
Men |
73.9% |
72.8% |
- 1.1 |
|
Women |
61.9% |
67.1% |
+5.2 |
|
Total |
69.0% |
70.4% |
+1.4 |
|
Over retirement age | |||
|
Men |
8.9% |
7.9% |
- 1.0 |
|
Women |
8.1% |
9.3% |
+1.2 |
|
Total |
8.4% |
8.9% |
+0.5 |
Note: all figures share of age group in work or actively seeking work
Source: Labour Market Trends, February 2003
1.183 However, the perception that the workforce is now much older than it was in the past is premature. The average age of the workforce has changed little over the past twenty years. Moreover, the share of older workers of 50 years showed no increase comparing 1981 and 2001. Recent estimates by Sylvia Dixon of the Office for National Statistics of changes in age structure of the labour force between 50 and retirement age are shown below.
SHARE OF OLDER WORKERS IN LABOUR FORCE 1981-2001
|
Share 50 or older |
1981 |
1991 |
2001 |
|
Men |
25.9% |
22.1% |
25.1% |
|
Women |
23.1% |
19.0% |
22.8% |
|
All |
24.9% |
20.6% |
24.0% |
Source: Implications of Population Ageing in the labour force, Sylvia Dixon, Labour market Trends February 2003
1.184 What will happen over the next ten years is something of an informed guess. We noted earlier that long run demographic projections were likely to have significant errors of margin. Trying to guess changes in the labour force over 20, 30 or even 50 years must give rise to even bigger errors.
1.185 In the article quoted above, Dixon notes that the latest population projections imply that while we will see further ageing it will take place at a similar pace to the 1990s. The latest set of projections for the labour force suggest that the share of workers between 50 and 64 will increase by about three percentage points by 2010, although these do not yet take account of the 2001 Census results.
1.186 Dixon makes two key conclusions suggesting the impact of workforce ageing as such on the labour market will be limited. Firstly, 'the labour market has adapted to significant changes in the age structure of the labour force in the past' and as the pace of change is not expected to accelerate 'there will be considerable time for labour market participants and institutions to adjust'. She also concludes that past research has found that 'the magnitude of demographic effects estimated in past research has typically been relatively small. In addition, historical experience indicates that the effects of demographic changes can at times be offset or obscured by the impact of other supply side and demand side changes.'
1.187 However, she adds the important qualifications that knowing what will happen to the participation rate of older workers in the future is particularly difficult because we have several sets of competing pressures.
Discrimination against older workers
1.188 Employer attitude is the critical factor in considering how employment opportunities of older workers might be developed. It is hard to tell whether prejudice against the old in the hiring and firing policies of firms has increased or decreased over the past twenty years. In the 1980s and early 1990s public policy was focused on encouraging older workers, especially older manual workers, to take early retirement or move onto other benefits as the traditional industries restructured.
1.189 Even though the big scale redundancies from the traditional industries have largely been completed, redundancies continue and targeting older workers with the option of early retirement can still be an important way in which firms adjust the size of their workforce both in traditional and newer industries such as telecommunications. The intense competitive pressure in many product markets and the consequent work intensification means some firms may have become less tolerant of workers with recurrent health or sickness problems and less inclined to find less physically demanding work for workers with just a few years to retirement.
1.190 However, the sharp reduction in the supply of young people and the general improvement in labour market conditions over the past ten years may encourage some firms to take a more enlightened attitude to the employment of older workers in the future. The Government has launched a number of very welcome and constructive initiatives aimed at persuading employers to employ older workers. In the public sector, Government Departments are being encouraged to develop policies to pay, pensions, and working practices that encourage later retirement. The Treasury estimates that 20 per cent of the current public sector workforce will come up to retirement age in the next ten years, with even higher levels in some areas.
1.191 The TUC believes these initiatives would be strengthened by legislation against age discrimination. The 1998 Workplace Employment Relations Survey (WERS) notes 'in the two areas where there is anti-discrimination legislation (ie sex and race) equal opportunities policies were associated with greater employment of the affected groups; in the non-statutory filed of age there was no such association' (Britain at Work by Cully et al, 1999, p 28).
Green Paper Proposal: provide extra back to work help for those aged 50 and over and pilot measures to help recipients of incapacity benefits return to work
1.192 The TUC welcomes proposals to give extra back to work help for those aged 50 and over. The new deal 50 plus, a voluntary programme for people aged 50 and over who are not in employment has been running since April 2000 with some success
Green Paper Proposal: bring forward more generous increases for deferring state pensions and maintain State Pension age at 65
1.193 The TUC fully supports proposals to maintain the State Pension Age at 65, precisely for the reasons set out in the Green Paper.
1.194 This is a welcome reform. However, if significant numbers of older workers are to be persuaded to work on, such reforms must also be accompanied by changes in work organisation to make the jobs they do more flexible and more enjoyable. Also the government should look at introducing rules which allow those who defer taking the BSP, and die before they start to draw a pension to bequeath an equivalent lump sum to others.
Green Paper Proposal: implement age discrimination legislation covering employment and vocational training by December 2006, in which compulsory retirement ages are likely to be unlawful unless employers can show that they are objectively justified
1.195 The TUC welcomes the proposals to outlaw age discrimination, the TUC will be responding in full detail to the DTI consultation on the government’s age discrimination proposals.
Green Paper Proposal: allow people to continue working for the sponsoring employer whilst drawing their occupational pension, raising the earliest age from which a pension may be taken from age 50 to age 55 by 2010, and consulting on best practice to ensure that occupational pension rules do not discourage flexible retirement
1.196 We fully support allowing individuals to continue working for the sponsoring employer whilst drawing their occupational pension, as we believe this will help individuals avoid a 'cliff edge' at the end of their working lives.
1.197 The TUC does not support any proposal to increase the minimum age at which an individual can draw an occupational pension from age 50 to 55. We do not agree that it would offer an effective signal that working up to age 55 at the very earliest is the norm. We have given further comments under section five.
Green Paper Proposal: to change public service pension schemes, for all new members initially, to make an unreduced pension payable from age 65 rather than age 60
1.198 The TUC is strongly opposed to the proposal that the rules of the public sector pension scheme should be changed so that all new member can only draw their pension in full at age 65 rather than age 60.
1.199 No case has been made for the proposal to raise the public sector pension age, and current members of public sector pension schemes have expectation that they will receive their full pension entitlement at age 60. The proposal to raise the retirement age for public sector workers from 60 to 65 will have a disproportionate effect on manual and lower paid workers. It also ignores the problems facing older workers in retaining their jobs as well as those looking for new employment. Age Concern have stated that there are not as many people in full-time work at retirement age because they have been pushed into taking incapacity benefit or going part-time by their employers. Increasing the age from 60 to 65 in the public sector pension scheme does not tackle these problems, and anything will only deepen them.
Section Eight : Women, work and pensions
1.200 In the Green Paper it states, 'the Government proposes to look at how best to ensure that women are aware of their pension position and the choices they face'. The TUC is disappointed that the Green Paper has failed to tackle the fundamental causes of women’s poverty in retirement. The Green Paper concentrates on private pension provision, which in the TUC’s view does not effectively address the problem of low income in retirement for women.
1.201 When it comes to pensions women still do not do as well as men, some of the reasons for this are:
- Fewer women belong to occupational pension schemes
- Women tend to take more time out of the labour market than men, for example to look after children or elderly relatives, so there is less time to build up pension rights
- Until recently women lost out on pensions if they divorced
- Women generally earn less than men
- Many women (currently 1.4m) work but earn less than the lower earnings limit, and therefore are not building up entitlement to state pensions.
1.202 Pension schemes have discriminated against women in the past, for example in many cases part-time workers were not able to join employer sponsored pension schemes. Although the Preston decision [13] has allowed part time women to claim a back dated pension, many of the women affected have retired and are not able to claim a back dated pension from their employer.
1.203 Older women tend to have the lowest incomes in retirement; 46% of single female pensioners live in poverty [14] . Single Women have lower incomes than single men; single men have £194 average gross weekly income, single women have £153 average gross weekly income [15]
1.204 Older women’s incomes tend to be even lower because they are more likely to have an incomplete state pension record than men, this is due to factors such as paying the married women’s reduced rate contribution and around 70% of current female pensioners have no private pension in their own right [16] .
1.205 The problem surrounding women and pensions goes much deeper than not having saved enough for retirement and broken work records. Women are still earning less than their male equivalents; this issue must be addressed in order for women to be able to save more for retirement. In 2000, women’s average weekly income in the UK was £336.70, compared with a man’s average weekly income of £451.60 [17]
1.206 The annuities market is a further factor for women when it comes to retirement provision, currently in order for a woman to receive the same pension rate as an equivalent man requires a woman to pay higher contributions to her pension. The 'annuity' problem is being exasperated by the shift in occupational pension provision from final salary to money purchase. In these cases an equivalent male will get a better pension then the female unless she was able to contribute a higher amount to the money purchase pension. The TUC believes determining income on gender alone is unsatisfactory.
1.207 In order to tackle some of the problems faced by women the government introduced stakeholder pensions. The TUC saw this as a positive development because the charges are low and workers can contribute when they can afford to do so. However, as has been noted above. Workers are much less likely to save for a pension if their employer makes no contribution. Compulsory employer contributions to pension schemes would therefore alleviate some of the shortfalls for women. However there will always be groups of individuals for whom private provision is inappropriate, for these groups, only the state can provide the necessary levels of benefit and security.
1.208 In April 2002 the government launched the State Second Pension, one of the particularly welcomes features of the State Second Pension (S2P), which replaced State Earnings Related Pension Schemes (SERPS) with effect from April 2002 is the focus on the low paid, so people earning less than £10,800 (2002/2003 rates) will be deemed to have earned £10,800. This will be particularly beneficial to women and would not have been possible under SERPS. The government also made some changes to National Insurance contributions, since April 2000 individuals can be treated as having paid NI contributions if their earnings fall between the lower earnings limit (LEL) and the primary threshold (£4,615 2002/2003).
1.209 The lack of adequate pension provision for women is a major concern for the trade union movement. The TUC will be publishing a report on women and pensions later in the spring. The report will address the issues faced by women and ways in which these issues can be resolved, ensuring that women no longer face poverty in retirement.
Section Nine : Conclusion
1.210 The TUC welcome the government’s recognition in issuing the green paper that there are pressing matters that need to be dealt with in the pension system. It is no exaggeration to say that pensions are top of the trade union agenda. In addition to the long-term trend of eroding state benefits, reckless short-termist actions by employers are undermining occupational pension provision to the extent that for the first time for generations today’s workers may face a bleaker retirement than their parents. The government needs to take action.
1.211 Much in the green paper we welcome. The proposal to require employee consultation over scheme changes is vital and should be introduced as soon as possible. We are fully supportive of the move to simplify provision to help employers maintain and modernize good schemes .
1.212 The TUC supports the replacement of the MFR by a long-term scheme specific standard within a regime of transparency and disclosure, we believe that a scheme specific standard should not mean an 'employer' or 'actuary' specific standard. We strongly believe that greater protection is required when defined benefit schemes are wound-up. Such protection should be provided by the establishment of a Pension Protection Fund (PPF) to secure preserved pensions on a continuing basis. Solvency insurance should cover any shortfall in scheme assets due to insolvency of the employer.
1.213 We also support the establishment of a task force on best practice in occupational pension provision, and the proposals on raising awareness of pensions and improving take-up. We believe there should be a wider debate about the scope for workplace-based advice.
1.214 But the TUC believes there are elements that are missing from the paper. The TUC is disappointed by the lack of proposals aimed at improving pensions for women. The TUC will be publishing a separate note on women and pensions outlining our proposals for improving women’s retirement income. We also urge the government to reconsider raising the minimum number of member-nominated trustees on any board to 50%.
1.215 And there are points we must challenge vigorously. We cannot accept that in a prosperous society it is right to be raising the retirement age. While the government was right not to alter state pension age it has recommended that retirement age in public service be increased.
1.216 In addition we would warn the government strongly against using the US 401(k) share ownership scheme as a model for UK pension provision, and urge it instead to consider the successful Australian model.
1.217 Most importantly we feel the government must recognize urgently that the time of voluntarism in UK pension provision is over. The current crisis demonstrates that employer commitment to pensions can quickly evaporate leaving employees with severely damaged retirement expectations. The UK urgently needs an open and honest debate about the extension of the level of compulsion in the pensions system. We welcome the establishment of the Pensions Commission and are confident that it will address this issue fully.
1.218 However even with these reservations we recognize that the green paper represents an important opportunity to modernize and strengthen the pension system in the UK and look forward to co-operating positively to help make the recommendations work.
Appendix One
2.1 A
Congress House
Great Russell Street
London WC1B 3LS
telephone 020 7636 4030
fax 020 7636 0632
contact:
Michelle Lewis
020 7467 1327
|
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[1] The State Earnings related Pension (SERPS) is to be replaced by the State Second Pension (S2P) in 2002. S2P will in principle offer a small additional amount of income for all workers who are contracted in to the scheme, but the principal beneficiaries will be those earning less that £10,500 per year.
[2] Occupational Pension Schemes 1995 - Tenth survey by the Government Actuary
[3] NAPF annual Survey 2001. Pages 34 and 40.
[4] Pensions and the Labour Market , report by the Pension Provision Group, September 2000.
[5] The flexible labour market: implications for pension provision , NAPF, August 1999.
[6] http://www.inlandrevenue.gov.uk/stats/pensions/p_t08_1.htm
[7] NAPF annual Survey 2001. Page 34
[8] Lessons from 401(K) Plans, TUC Economic and Social Affairs Department, Oct 2002.
[9] How Well Are Employees Saving and Investing in 401(k) Plans? Hewitt Associates, 2000
[11] What makes people save? - A research report, ABI, December 2002
[12] Sandler Review of Medium and Long-term Retail Saving in the UK, July 2002
[13] Preston v Wolverhampton NHS Trust
[14] Fawcett Society: future pensioners winners and losers, 4 September 2002
[15] Simplicity, security and choice: working and saving for retirement, DWP Pensions Green Paper, December 2002.
[16] ibid
[17] NES, 2000 (Great Britain revised edition)
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