| The
long road to reform
Pensions Age
simplification roundtable
With less
than a year to go until the simplification deadline, the collation
of a panel dedicated to the topic seemed more than timely. This
month, in the first in a series of three, our five industry experts
contemplate the concept of simplification, whether the government
is set to achieve what it intended, how far their companies have
come in the run-up to A-day, and what problems the new regime is
likely to throw up in the coming years.
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The
cast:
Chairman:
Jeremy Ward
is responsible for all aspects of pensions marketing at Friends
Provident, including strategy, product management, pricing, communication,
systems development and external funds. He has been very closely
involved with the development of the innovative 'New Generation
Pensions' systems which introduced true straight-through processing
to the group pensions market. In 2003, Jeremy directed the development
and launch of FP’s Activ range of multi-manager funds, and
is regularly quoted in the pension press.
 Raj
Mody is a pensions strategy consultant with
Hewitt Associates and a member of the Hewitt Leadership Group. He
advises clients on a full range of pensions and benefits issues
including funding strategies, benefit design and communication,
sales and acquisitions, scheme restructuring and changes from government
reform. Raj previously headed up the Hewitt’s Leeds office
and before that worked at the firm’s Epsom office in a senior
consulting role. His personal clients include major UK and multi-national
organisations.
Nick
Burns is group managing director at PIFC Consulting.
He joined PIFC in 1989 and the Board in 1992, having started out
in the pensions industry with Norwich Union. Nick led the secondary
buy-out of PIFC in 1992 with PIFC's private equity investor, Graphite
Capital. Having now worked within the HR and Employee Benefits industry
for over 20 years, Nick has extensive experience in employee benefit
design, corporate restructures, executive planning and communication.
He has overall responsibility for PIFC's group strategy.
David
Marlow is marketing director at Alexander Forbes
Financial Services. David has a long background in life and pensions.
He gained his grounding at Equity & Law Life Assurance Society
(now AXA) in a variety of roles from 1984 to 1998. From here he
went to National Mutual (now GE) as product development manager
and then joined The Annuity Bureau as head of marketing in 2000.
Since May 2004, David has been Marketing Director for national IFA
business Alexander Forbes Financial Services.
John
White is head of pensions and investments at
RSM Robson Rhodes. He has worked in the industry for 18 years, qualifying
as an associate of the Chartered Insurance Institute while working
for NPI. He was employed as a pensioneer trustee throughout the
1990s, and joined RSM Robson Rhodes in 1997. He has advised on a
variety of pension plans. He also established and Chairs the Internal
Investment Panel, which involves interviewing fund managers, determining
investment strategies and benchmarking performance in relation to
set standards.
 Matthew
Swynnerton is an associate at DLA Piper Rudnik
Gray Cary UK LLP specialising in pensions. He is a secretary of
DLA Piper's independent trustee company and therefore has practical
experience of the day-to-day issues frequently faced by trustees.
Matthew is also secretary of the Education and Seminars Sub-committee
of the Association of Pension Lawyers, where he is involved in running
technical seminars, and has been chairman of another APL sub-committee
since 1999, regularly organising and delivering seminars for its
members.
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The debate:
The
simplification concept
Chairman: "With
less than one year to go until A-day, preparations for simplification
are finally getting under way. How are you all feeling about the
new legislation at this stage?
Marlow: I think if consumers are to be
convinced that we are genuinely looking to simplify the system and
make life easier, it is not being reflected in the body of
legislation and the number of statutory instruments (SIs) that have
been issued.
That’s not to say that, in the long run, the bulk of changes
won’t simplify the landscape – I think they will –
and the reduction in the number of tax regimes is welcome. The challenge
for us now is keeping our clients well informed in advance of the
changes taking place.
Mody: I think if we look at the word simplification
and how it came about it has two meanings: one is the vision from
the Inland Revenue (IR) and its attempt to simplify the tax regime
which is reflected in the Finance Act 2004, which I think they will
achieve to a certain extent. This is because the package they have
put together should achieve real reform – they haven’t
just tinkered around the edges and come up with some half-baked
idea; they have actually pushed through a piece of visionary legislation
and the concept of a lifetime allowance, at least in its purest
form, is unique.
The other strand of simplification lies in the attempt to simplify
the overall pensions framework with the introduction of the new
Pensions Act – and this has been less successful in that the
Act is far too complicated and hasn’t really been thought
through. In addition, the pace of change at the moment means there
is virtually something new coming out every day and it is a struggle
for the industry to keep up, for example, we have primary legislation,
SIs sitting under that, and we now also have Codes of Practice.
White: We have always related the Finance
Act to Simplification and the Pensions Act to Securitisation and
I am not sure the latter was ever supposed to be simple, and I agree
it certainly isn’t.
Burns: The strap-line that was originally
used by the government was ‘Simplicity, Security and Choice’
and in the marketing we have been doing with employers, trustees
and staff we align the ‘Simplicity’ and ‘Choice’
elements to the Finance Act, and ‘Security’ to the Pensions
Act.
At the end of the day, though, whether any or all of these are achieved
is irrelevant if, at the basic level, people who are in pension
schemes don’t actually understand what they have. So, this
is a fantastic opportunity for us around this table and the whole
industry to take action, and try to raise awareness and understanding.
I also agree that, in the long run, things will be more straightforward
for most people under the new Finance Act, and the fact that most
people won’t get anywhere near the lifetime allowance means
things will certainly be more simple for them.
Marlow: Picking up on that example, the
fact that we have got an annual limit and now a lifetime limit says
to me that the IR is being a bit paranoid – if we have an
annual cap on the amount that can be paid in, why do we need to
have an ultimate cap on the fund? I think the annual allowance is
incredibly generous and by having any form of lifetime cap it is
giving off the wrong messages to consumers i.e. that you might not
benefit in the way that the scheme was designed, and although it
may be a minor issue in terms of how many people are going to realistically
be hit by the cap, it is one more thing that has generated negative
press and could further damage the perception of pensions.
Swynnerton: But all in all, I don’t
think anyone would disagree that the concept of simplification is
welcome; it’s how we get there between now and 2006 and then
ultimately 2010 that's the main issue. The Finance Act is complicated
and technical and we are going to get even more regulation in the
next 12 months. It is only now that companies and trustees are starting
to look at what they have to do before April next year, which flexibilities
they are going to choose and how it is all going to be communicated
to the members.
White: This identifies a key issue - that
it is our job to effectively communicate the implications of the
new legislation to our clients. It might not be simple to read so
many pages of legislation, but it is our job to assimilate that
information and to send it out in a way that they can understand.
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Client
progress
Chairman: To what extent then are your
clients making progress towards 2006?
Swynnerton: Our clients, particularly
our trustee clients, are just starting to receive advice from their
advisers on what changes they are going to have to put in place.
From our point of view as lawyers, we are looking very differently
at the Pensions Act – which is regulatory and restrictive,
and the Finance Act – which is permissive.
Our company and trustee clients are also reacting differently to
the two – they are acting and reacting now to the Pensions
Act, whereas they feel a bit more relaxed about the Finance Act
because they have got until 2006 to make any necessary amendments
to their schemes. They also feel that those amendments cannot be
made at the moment in relation to the Finance Act because we are
still waiting for more regulations and IR guidance.
Mody: I think you raise an important point
– the Finance Act is permissive so it opens up opportunities
that companies can choose to take advantage of. Saying that, there
are elements of the Act that most companies will have to react to,
for example around changes to the earnings cap regime or in relation
to arrangements they have in place like FURBS and UURBS.
Burns: There is also the matter of enhanced
and primary protection decisions for higher earners and help with
making these decisions needs to start now. In fact, I see this as
one of the most important areas employers have to face over the
next twelve months – identifying those employees who have
an issue in terms of either enhanced or primary protection.
Mody: I think you are right. The solution
will vary enormously across each organisation and there is no magic
bullet for any of these issues; the answer lies in an analysis of
those individual members.
You are usually having to blend together two approaches towards
solving these problems – one is an establishment of the principles
i.e. what should your benefit and reward structure look like for
that population; and two, the data driven route, which is an analysis
of individual members, and for this we are using modelling and projection
tools.
Marlow: We are also finding that people
need their hands held on this. I know we are potentially talking
about sophisticated individuals but they are generally not very
engaged with their pensions and we found that before we can even
get onto the question of whether they are going to affected in the
future, they need educating about what they have got today and what
benefit entitlements they already have accrued.
White: Not enough people have got that
information - they don’t know where they are today, never
mind where they are going. There will come a point soon where there
will be a log-jam preventing this information coming out and whether
it is coming out from the administration houses and the actuarial
firms, or the insurance companies, there are not enough people to
produce that information and IT capacity in the industry is not
strong enough to cope.
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Alternative
funding vehicles
Chairman: Are you yet looking at alternative
funding vehicles for those high earners that are in danger of hitting
the limit?
Burns: Most firms we are talking to are
intending to simply provide an “allowance” via salary
and let them buy whatever other investments they choose, whether
they be VCTs, ISAs and so on. We haven’t yet come across a
viable ‘tax efficient’ alternative vehicle.
White: We have had a lot of off-shore
companies knocking on our doors.
Mody: Well, if individuals are looking
for tax advantaged arrangements, while there might be some short-term
opportunities, for example offshore, I am not sure it is necessarily
the most reliable way to go for long-term pension planning because
the IR has already indicated its intention to clamp down on anything
it regards as having a hint of tax avoidance.
From a corporate point of view, Employer Financed Retirement Benefits
Schemes (EFRBS) will replace FURBS and UURBS under the new rules.
In terms of tax advantages, these vehicles at least allow you to
avoid NI contributions and while this may not be quite as tax advantageous
as a tax approved pension build-up under lifetime allowance, it
is going to be better than cash.
The other thing we should not overlook is the issue around the recovery
charge, and there may be circumstances where it is not an unappealing
prospect particularly if you have built up those benefits a long
way in advance of reaching retirement, as at least you will have
the benefit of tax-free returns before you get around to actually
drawing down that income. It is not necessarily a great thing to
do in the year before you retire though.
Marlow: While I am not disagreeing with
the point that in some circumstances it may make sense to over-fund
into the scheme, particularly as it keeps some of your costs low
and makes life more simple, let’s not ignore the fact that
some people could be hit by as much as a 55 per cent charge if they
go over their allowance.
We have a small proportion of our clients who are already going
to be over the limit and I think at this stage all we can do is
arm them with the facts and give them the forecasting information
they need to make sure they are well informed enough to make a decision
one way or the other.
White: It think the whole area of alternative
funding vehicles will generate more of an interest in 2006-2007
when the money is there and nobody can find a home for it.
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Trustee
duties & conflicts of interest
Chairman: The new legislation is also
increasing the pressure on today’s trustees. What impact will
this have?
Swynnerton: Our clients are already finding
it very difficult to recruit trustees and that’s nothing new
– I don’t think it is just the new legislation that
has done this but it has been the case for some time.
Mody: That takes us onto another subject
which is about the trustee knowledge and understanding requirements
that have been introduced. The Regulator is currently working on
its Code of Practice which will formalise and deepen the level of
knowledge that even member nominated trustees (MNTs) will need to
have. While this is welcome, if you look at the draft document it
looks like an exam syllabus and I think it is scary enough for current
trustees, let alone new trustees who probably don’t have a
clue what it will actually entail if they put themselves forward
for the role.
Burns: I agree – I think it is frightening
enough for people in our own industry to take on that responsibility.
In fact, I don’t know many people in our industry –
professionals who have been working in pensions for a long time
– who would step forward and be a trustee. I wouldn’t,
and if I wouldn’t and I have been in the business for 20 years,
how can I expect the employees of our clients to step forward? Do
we believe the requirement for more MNTs will really offer more
security? I don’t.
Chairman: What about conflicts of interest
– is this a significant issue?
Swynnerton: I think it is and it is one
that we as lawyers are having to advise on more and more. Lawyers
often have to advise both trustees and companies on their schemes
which is becoming increasingly difficult to do because of general
conflict issues.
While this isn’t something specific to simplification, as
it is something that comes up time and time again with scheme amendments,
the onset of simplification does mean that all schemes are going
to have to make amendments one way or the other. The problem is
that trustees and companies might have competing interests about
when and if to make certain rule changes, and where an amendment
power requires both trustee and employer consent, resolving this
conflict can be quite difficult.
Then there is a separate conflict that arises when a trustee is
also a scheme member – they will not want to cap their own
benefits. This can put trustees in a very difficult position. For
example, an employer might want to retain a current IR concept such
as the earnings cap or raise the minimum early retirement age to
55 at the earliest opportunity. It will be difficult for the trustees
to agree as they have a duty to act in the best interests of the
members as a whole. There is no real answer – it has to be
looked at on a case-by-case basis.
White: There is no doubt the perception
of conflict in the industry creates distrust - in fact, I think
this is a fundamental reason for the mistrust of pensions, per se.
For example, the government has got a vested interest in making
changes to the pensions landscape and they may not necessarily have
the members’ long-term interests at heart; members are driven
by unions as a body who have a vested interest to get the best rates
they can; then the employer, who is represented by the CBI, will
have a different view.
And there are conflicts within the schemes too – for example,
when we do seminars I always ask all the trustees to put up their
hands; I then ask them to put their hands down if they are not the
biggest member of the pensions pot, or if they are not the finance
director, and there is always someone with their hand still up because
he is the FD, he is the biggest member of the scheme and he is a
trustee. He is also often the most worried person in the room!
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Marlow: To return to the point we were
making earlier about MNTs and who would do the role, do we have
a system here that is ultimately going to fail? The intention was
that by increasing the number of MNTs the members’ rights
would be more protected, but if the reality is that no-one wants
to step in to do the role, it won’t be achieving its original
objective and all of these things just become more hurdles in the
way of actually running a good DB scheme.
To follow on from this, if the rules end up not being effective
in the right way, then clearly they were ill-conceived in the first
place and all they are doing is further damaging the confidence
and the running of DB schemes.
Burns: And what a responsibility DB and
DC trustees have on their shoulders – even if trustees take
professional advice and they make a bad decision based on that advice,
they are still not off the hook. Under DC they will be making investment
decisions for their workforce – when they know very little
about pensions, let alone investments – that is a huge responsibility.
Swynnerton: Although if in the normal
course of events trustees rely on their professional advisers and
the advice turns out to be negligent then they will normally have
a claim against the adviser.
Mody: The source of all this concern is
the benefit design itself – you can’t
eliminate the risk that goes with a DC benefit design – the
trustees can’t do that and the members can’t do that
so, the only thing you can do is make sure members are well aware
of the risks; so if you are talking about a DC context and trustees
of a DC occupational scheme there is nothing they can do about that
unknown investment risk in the future.
Burns: Apart from get out of it and go
into a contract-based arrangement. Then there are no grey areas.
Mody: Then you have eliminated the trustee
body so that is not necessarily leaving the members any better or
worse off.
Burns: But I am talking about making the
trustee better off. It’s back to the point about who would
step forward and if no-one does then much of this legislation that
has been put together to achieve won’t work, so companies
naturally will migrate to contract-based arrangements."
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