Government focuses on pension security

Less than three months after the closing date of the consultation on the pensions Green Paper, the government has published details of the reforms it is actioning. It has moved benefit security to the top of its pensions agenda after widespread concern about schemes winding up with massive deficits. We examine which suggestions have been accepted and which rejected.

Summary of key points

The Department for Work and Pensions has published its follow-up to its consultation on the pensions Green Paper.

The focus of its action plan set out in the new paper is on the security of members' benefits, with the planned introduction of a Pension Protection Fund for schemes run by insolvent employers, and a new requirement for solvent employers to buy out benefits in full if they wind up their schemes.

Limited price indexation is now to be capped at 2.5% pa.

Employers will be able to convert accrued rights into alternative benefits of no less actuarial value, provided DB rights are not converted to DC rights and trustees' consent.

Limited protection is to be given to employees under TUPE on a business transfer.

All defined-benefit schemes will have to provide an annual pension forecast.

Proposals to put pension schemes higher up the priority order for creditors on a company's insolvency, to dispense with the requirement for a spouse's pension in contracted-out schemes and to permit membership to be made compulsory have all been dropped.

As public concern mounts over the security of occupational pensions, the government has switched the emphasis of its proposed pension reform from simplification to protection of pensions. In its follow-up¹ to the consultation on the Green Paper , the government has set out its action plan for progressing its proposals. At the same time it issued its reply² to the Select Committee report on the future of UK pensions covering much of the same ground, but also including a defence of the state system.

More than 800 submissions were made to the original consultation, with further feedback from nearly 2,000 people who attended consultation events. The new paper quotes selectively from these responses.

Streamlined proposals

The action plan is a much shorter document than the Green Paper. In it, the government has grouped its ideas into just three sections: increasing member security and protection; simplifying pension provision for employers; and planning for retirement.

The government declares in the introduction to the action plan that it has "developed a package that strikes a balance between tough choices. The measures bolster members' security, while ensuring, through simplification and deregulation in some areas, that the costs of providing good schemes do not rise." According to the government's own calculations, the net cost impact will range from cost neutrality to savings of £150 million a year, depending on the action that employers choose to take. However, as discussed below, the net figure hides some huge potential additional costs that may arise out of some of the proposals.

One area where the government has adamantly refused to take action is that of the state pension scheme. The only reference to it in the response paper is in respect of raising the state pension age to 70, an idea the government yet again rejects on the basis that the less well off would be disproportionately disadvantaged by such a change.

No details have yet been given about the tax simplification plans, other than that the government has taken heed of the numerous comments about the proposed implementation date of the changes. Originally planned to take effect from April 2004, the new regime is now likely to take effect a year later in April 2005.

IMPROVING MEMBER PROTECTION

Only eight of the many pages in the Green Paper were devoted to ideas for improving the security of pensions. However, since December, when that paper was published, concern over the safety of pension funds has grown following some highly publicised pension scheme failures. Many of the responses to the Green Paper commented that people would not invest in pensions unless security was improved.

Pension Protection Fund

The introduction of a compensation scheme has moved from being almost an afterthought in the Green Paper, with just one short paragraph devoted to the idea, to becoming the main thrust of the government's proposals for increased protection of benefits.

The government originally suggested two possible ways of protecting the benefits of members whose employer became insolvent and left an underfunded defined-benefit (DB) scheme:

a centralised "clearing house" into which people could pay the funds they received on winding up, with the clearing house then seeking to purchase the best available annuity from an insurance company on their behalf; and

some form of central discontinuance fund that would underpin the benefits of people if their employer became insolvent.

The latter solution provides members with greater protection and this is the one the government has chosen to adopt. The compensation scheme, to be called the Pension Protection Fund, will guarantee the pensions of employees whose employers become insolvent and whose pension fund is in deficit. The fund will pay 100% of pensions in payment and 90% of the benefits of those still working, although there is likely to be a cap on pensionable salary. The government is seeking views from the employer task force on the level of the cap.

The arrangement will be modelled on the Pension Benefit Guaranty Corporation in the US (see feature ), although the government hopes to avoid some of the mistakes made by that scheme. It will be run by a statutory body, but the government will not be acting as its ultimate guarantor.

It is intended that the scheme will be funded by a flat-rate levy (which will presumably be based on the size of scheme membership, although this is not specified in the paper) payable by all DB schemes, other than those public sector schemes where the benefits are guaranteed by the government. On top of this, to avoid the problem of moral hazard, where schemes are deliberately funded to a low level or adopt a high-risk investment strategy, underfunded schemes will pay a higher premium.

The government estimates that if benefits are capped, the cost of the fund will be in the region of £340 million-£375 million a year. The actuarial profession has queried this figure, believing it is more likely to be in the region of £1 billion a year.

The introduction of the Pension Protection Fund has been broadly welcomed, although a number of organisations are concerned about how it would work in practice. The Association of British Insurers (ABI) believes that it may not be viable if the government is not prepared to act as its ultimate guarantor.

Winding up by solvent employers

A recent problem to emerge has been that of solvent employers winding up underfunded schemes and leaving members with greatly reduced benefits. Two options for dealing with employees' pensions when this happens were put forward in the Green Paper:

a "full buy-out", where employers would be required to ensure there were sufficient funds on winding up to enable annuities to be purchased for all members that would guarantee their benefits in full; and

a "partial buy-out", where full protection would be provided for pensioners and those nearing retirement - younger employees would continue to be entitled to just the cash equivalent transfer value (CETV), as at present.

The Pensions Advisory Service (OPAS), with its first hand experience of hardship in this area, argued cogently for the first suggestion to be adopted in its comments on the Green Paper. It was in the majority, with only 16% of more than 200 comments received about the issue not being in favour of this option. The government has, therefore, been persuaded to take it forward, although it adds the caveat that if meeting the full cost of benefits would put the company at risk, trustees may agree a lower amount.

So keen is the government to introduce this change, that it has already started a limited consultation exercise on the form of draft Regulations³ that it hopes will take effect as soon as possible. These provide for the existing Winding-up Regulations to be amended. Where an employer that is solvent commences winding up, the debt on the employer will be set at a level that brings the scheme's assets up to the amount required for the full buy-out cost. This includes the trustees' estimation of all expenses likely to be incurred during wind-up, together with the actual costs of buying annuities or deferred annuities for all members. The Regulations will apply to wind-ups commencing on or after the date on which the action plan was issued.

While this proposal has been broadly welcomed, the Pensions Management Institute (PMI) has expressed concern that it will encourage employers to run their schemes as closed funds. In addition, the actuarial profession queries the government's assertion that the cost of this proposal is likely to be £50 million-£100 million. It states that the current potential shortfall in UK pensions is £300 billion.

The action plan also mentions that, in line with this proposal, the government will restrict the ability of companies to remove surplus from a fund unless the benefit promise can be met in full. Actuarial reports will be required to show the level of funding on this basis, and the actuarial profession has published an exposure draft of a new Guidance Note (EXD51 - see box). Company accounts may also need to reflect this new higher liability under the FRS17 accounting standard.

Changing priorities on winding up

A number of ideas were put forward in the Green Paper to try and ensure that on winding up, scheme assets are shared out more fairly than at present. The current system favours pensioners over other members, and there have been a number of recent cases of long-service employees losing a large percentage of their accrued benefits, while benefits continue to be paid in full to pensioners under the same scheme.

Among the options originally suggested by the government to redress the balance were:

increasing the level of priority for people approaching retirement age;

basing the level of protection on the number of years the individual has contributed to the scheme;

recouping part of the pensions of directors who retire shortly before winding up commences; and

moving pension schemes up the priority order of creditors on insolvency.

Only one of these suggestions is being taken forward, that of offering the greatest degree of protection to members with the longest service. Priority will also be given to the rights of non-pensioners over the future indexation of pensions in payment.

The government has stated its intention of publishing draft Regulations on this change shortly. It hopes to bring this into force by autumn 2003.

Better pension provision

The action plan contains a number of proposals that the government hopes will improve the pensions of certain groups, such as those who leave with short periods of service, or employees who work for a company that is sold.

In the Green Paper, the government suggested that pension rights should vest immediately, with no refunds allowed, although de minimis amounts could be compulsorily transferred out. This gave rise to expressions of concern over the amount of additional work this would involve. Therefore, the proposal has been modified so that employees with at least three months' service, who leave during the vesting period, must be offered the payment of a CETV to another pension arrangement of their choice.

Yet again, the government has announced its intention of extending the Transfer of Undertakings Regulations (TUPE) to cover private sector pensions. It states that it does not wish to place an excessive burden on employers who take over other companies. Therefore, it is proposing that the new employer should be obliged to match employees' contributions to a stakeholder pension up to 6% of earnings. The paper does not provide for the situation where this amount is greater than the contribution being made by the former employer.

The Pickering report on the simplification of pensions recommended that employers should be able to compel their employees to join a pension scheme. The government sought views on this issue in the Green Paper, and has decided not to take it any further as the majority of respondents were against it.

Consultation laws planned

Although it is already recognised good practice for employers to consult with employees or their representatives before amending pension arrangements, the government is going ahead with its proposal to make this a legislative requirement.

Detailed proposals will be included in the consultation exercise on the implementation of EC Directive 2002/14 on information and consultation, planned for summer 2003. The Directive, which has to be incorporated into UK law by March 2005, gives employee representatives improved rights of access to information and consultation on issues related to business activity and employment.

The new Pensions Regulator

Unsurprisingly, the Green Paper response reiterates the government's intention to introduce a new system of pension regulation, with a new Pensions Regulator built on the foundations laid by the Occupational Pensions Regulatory Authority (OPRA). The government has adopted the recommendations of the quinquennial review of OPRA (OP, May 2003) that the new regulator should be proactive and focus on tackling fraud, bad governance and poor administration. Its objectives will be set out in legislation and it will operate alongside the Financial Services Authority.

Another proposal contained in the Pickering report was that pensions legislation should be simplified and supplemented by codes of practice. The government agrees and will give the new Pensions Regulator the power to issue these codes. This should do away with the need for detailed Regulations. The codes will not be enshrined in law, although they may be used as evidence in proceedings to determine whether legislation has been breached.

The government intends that some of these codes of practice will cover the standard of care to be exercised by trustees when performing their functions. Currently, unpaid trustees are expected to exercise the same care as an ordinary prudent person when carrying out their functions. Following the proposals in the Myners report, the government consulted initially on introducing a new standard of care for trustees in relation to investment matters only (OP, March 2002). This would have required trustees to act with the skill that a prudent person familiar with investment matters would use. As a result of representations, the government has decided to introduce legislation requiring trustees to be familiar with the issues, or have relevant knowledge in respect of all of their responsibilities. The codes of practice will provide guidance on how the legal requirement should be met.

SIMPLIFICATION

The action plan commits the government to introducing a number of measures aimed at simplifying pension provision for employers and pension providers and giving them greater flexibility. Most of these have been developed from the recommendations in the Pickering report. In several instances the government's intention to make changes is confirmed, but little or no additional detail is provided.

The full list of changes under this heading is as follows:

introducing a scheme-specific funding requirement;

reducing the level of indexation applied to pensions in payment;

relaxing the application of s.67 of the Pensions Act 1995 that protects accrued rights;

requiring all schemes to have at least one-third member-nominated trustees (MNTs), but allowing maximum flexibility to schemes provided that overall requirement is met;

introducing "streamlined" rules for contracting out;

removing the requirement for occupational schemes to have an additional voluntary contributions facility;

rationalising the Disclosure Regulations;

providing more flexible rules on internal disputes resolution procedures;

clarifying the Pensions Ombudsman's jurisdiction; and

giving more flexibility for the operation of pension sharing on divorce.

The government reveals in the action plan that it has decided not to go ahead with the amendments to survivors' benefits that would have removed the need for contracted-out schemes to provide a spouses' pension. Two reasons are given for discarding this idea: the impact on the incomes of retired women who have traditionally relied on their husbands to provide for their retirement; and the small number of schemes likely to make the change, had it been permitted.

Scheme-specific funding

The government announced its intention to replace the minimum funding requirement (MFR) with a scheme-specific requirement over two years ago (OP, April 2001). There is little new in the latest paper. It reiterates that the key elements of the proposal are:

scheme trustees will be required to draw up a statement of funding principles and to obtain a full actuarial valuation of their scheme at least every three years;

following the valuation, the trustees will be required to put a schedule of contributions in place, setting out how much the employer and employee will pay into the scheme;

where trustees and employers cannot reach agreement on issues fundamental to the funding of the scheme, the trustees will be given, as a last resort, powers to freeze or wind up the scheme; and

the scheme actuary's duty of care towards scheme members will be clarified.

Under the government's revised proposals on security of benefits, solvent employers would be required to buy out benefits in full if a scheme was wound up. This strengthens trustees' arm in the envisaged discussions they would have with the sponsoring company about the scheme-specific funding and the contributions needed to achieve it. According to Watson Wyatt, it "tilts the balance of power in favour of the trustees".

The latest paper also mentions that trustees will be required to send regularly updated information to scheme members each year, containing key information about the funding position of their scheme. This is intended to be in line with the likely requirement of the new EU pension fund Directive, the text of which has yet to be published.

There is no mention in the action plan of the related move, mentioned in the Green Paper, to drop the requirement for transfer values to be based on the MFR.

Indexation reduced

Limited price indexation (LPI), whereby pensions in payment from DB schemes must be increased in line with inflation capped at 5% pa, has applied to all pensions accrued from April 1997. It is a costly provision when inflation is low - and inflation has now been under 5% pa for over 10 years. The Pickering report recommended that the requirement should be dropped, with employers being able to apply LPI if they wished. The hope was that an employer would take this step rather than close a DB scheme completely.

The Green Paper put forward a number of possible options for reducing the cost and effect of LPI, one of which was capping increases at 3% pa. However, the government seemed unenthusiastic, saying that it "would not introduce changes in this area unless it had good reason to believe that the coverage of and contributions to occupational pensions would be higher than would otherwise be the case".

The action plan indicates that the government will cap the requirement to increase pensions in payment at 2.5% pa. It seems that this could apply to pensions already accrued (and therefore effectively reduce these benefits), but it is clear it will not apply to pensions already in payment.

The government estimates that it could reduce funding costs for employers by between £345 million and £415 million a year.

Section 67 solution

Section 67 of the Pensions Act 1995 prevents trustees from modifying scheme rules without receiving member consent, so that members' accrued rights are reduced. It is claimed that this has, for example, prevented employers from merging schemes with similar benefit structures.

The Green Paper put forward a number of options for giving employers more flexibility, while at the same time trying to ensure members did not suffer. It suggested that changes could be made as long as the actuarial value of the new benefit package was no less than the old package, and that the change affected less than perhaps 5% of benefits by value. The government has now announced that it has dropped this de minimis idea and will allow any amount of rights to be changed provided:

the scheme rules allow the change;

no DB rights are converted into defined-contribution (DC) rights;

the trustees approve the change;

there is no reduction in the actuarial value of the benefits;

pensions in payment are not reduced; and

members are consulted in advance.

It seems that this will present trustees with some difficult decisions when they consider proposed rule modifications, balancing the needs of members on the one hand with an employer's understandable desire for simplification on the other.

Contracting out and GMPs

The action plan outlines a number of simplifications to be made to contracting out. These are:

relaxing some restrictions on contracted-out rights forming part of the tax-free lump sum permitted under Inland Revenue rules;

relaxing some restrictions preventing contracted-out rights being paid at the same time as other benefits;

increasing the level at which small pensions derived from contracted-out rights can be commuted (to an unspecified amount);

removing the requirement to obtain member consent for the commutation of pension arising from the graduated pension scheme, which ceased in 1975; and

extending commutation on grounds of serious ill health to contracted-out rights from appropriate personal pensions.

The paper also reiterates the intention to simplify guaranteed minimum pensions (GMPs), though it does not refer to the Department for Work and Pensions' consultation paper that has had a very limited circulation (OP, June 2003). No mention is made of the substantial and detailed proposals on the reference scheme test that schemes must meet to contract out on a DB basis that were in the Green Paper.

Simpler MNT proposal

The Green Paper put forward two options for introducing MNTs for all schemes, one setting out the bare requirement in legislation and backing that up with codes of practice produced by the regulator, and the other incorporating a requirement that the process be "fair and open". The government has opted for the first option, which it described in the Green Paper as a "very straightforward provision that would achieve the desired outcome, but perhaps not always in a way that would suit everyone". It rejected the second option, which would have addressed the fairness issue but which would have been "more exacting" and would have involved the regulator "in some costly and very difficult determinations (schemes would have to be in a position to satisfy the regulator that their arrangements are fair and open)".

PENSION PLANNING

The section of the new paper entitled "Choice for all - planning for retirement" includes measures to aid people's own pension planning, as well as a rag bag of other provisions.

At the outset, the paper says that the government believes that "people should have the choice over how and when they save, and how long they work". Curiously, its list of measures then includes increasing, by 2010, the earliest age at which people can draw a pension from 50 to 55 and raising the normal pension age in public service pension schemes to 65. The only new information on these plans is that it is envisaged that, from the end of 2006, new public service staff will join their schemes on the higher pension age.

The paper reiterates the government's intention to consult on age discrimination legislation during summer 2003. This is intended to allow people to work for longer if they wish to do so. In addition, the paper restates the intention to allow people to continue working while drawing on their occupational pension so as to allow phased retirement.

Pension forecasts

Great stress is placed on the need to provide personalised information "to make informed choice a reality". The government plans to build on the recently introduced requirement for DC schemes to provide an annual benefit forecast. The paper announces that DB schemes, as well as DC schemes, will be required to issue a benefit statement to their members showing the pension already built up and the amount they are likely to receive when they retire.

The action plan also announces that the government is beginning to issue state pension forecasts automatically, and at regular intervals. This programme began in May 2003 with forecasts for self-employed people.

In the government's view, combined pension forecasts covering state and private provision have "the potential to be a key motivator in encouraging people to engage in financial planning". Currently, 41 occupational schemes and four pension providers provide combined forecasts on a voluntary basis. The paper says the government wants to extend this across the pensions industry. But it warns that it will legislate to make such statements a requirement if necessary in the future.

The paper confirms that the government is to develop a web-based retirement planner, with the first elements becoming available in 2004.

Employer information

A significant minority of employers make little or no contribution to their employees' pensions, according to the new paper. The government is considering requiring employers who make no contribution, or one of under 3% of salary, to offer access to a minimum level of information and advice. Some or all of the following are under consideration: a state pension forecast; a reminder of the stakeholder pension scheme designated by the employer; a pensions information pack; and a presentation from, or an interview with, the designated stakeholder pension provider or another pension retailer.

However, before compelling employers to provide access to such information, it wants to find the best means of delivering such information. It is planning a pilot scheme to evaluate the different forms of information and advice in the workplace.

WHAT NEXT?

As the summary table indicates, the action plan gives a rough timetable for the introduction of the reforms.

During the summer, the government has announced that it plans to:

publish draft Regulations on changing the priority order on winding up;

lay final Regulations on requiring schemes that are winding up (and where the employer is solvent) to buy out members' benefits in full; and

consult on age discrimination legislation (with the legislation itself planned for late 2004).

In the autumn the government is to:

provide more details of its plans for reforming the taxation of schemes; and

lay final Regulations on the statutory priority order.

Most of the reforms are not expected to come into force before spring 2005, with age discrimination legislation coming in towards the end of 2006 and the raised minimum early retirement age effective from 2010.

Exposure Draft 51: disclosure by actuary to trustees of scheme's solvency position

To coincide with the publication of the government's action plan on occupational pensions, the Pensions Board of the Faculty and Institute of Actuaries has published an exposure draft for the revised text of Guidance Note 9: Retirement benefits schemes - actuarial reports.

The substantive change proposed by the draft, known as EXD51, affects the discontinuance section of GN9 by introducing a "solvency test". Once in place, the revised guidance will ensure that trustees know whether or not their scheme, as at the last valuation, was fully funded on a buy-out basis.

In future, GN9 will require the scheme actuary to give an estimate of the proportion of the accrued rights and entitlements that would have been covered at the valuation date if the trustees had adopted an investment strategy of matching the assets to these benefits. The actuary may use an insurance company buy-out cost for this, or may calculate the liabilities using those principles likely to be adopted by insurance companies for determining such a cost. But it will no longer be possible to base a solvency test on cash equivalent transfer values.

A Pensions Board discussion paper, A review of the principles for measuring solvency, setting out these principles in more detail was issued at the same time as EXD51.

Ronnie Bowie, who chairs the Pensions Board, stated: "When implemented, EXD51 will require explicit disclosure of a scheme's solvency position. The new guidance will require actuaries to disclose in a report to trustees whether the assets of the scheme are sufficient to meet the cost of buying out the liabilities with an insurance company, in the event that the scheme is discontinued on the valuation date.

"The draft permits various methods for making this assessment. If the assets aren't sufficient, the actuary must say what percentage of the members' pensions are covered, differentiating the position for pensioners from current members, who typically rank behind members in the priority of payment under pension scheme rules."

The Pensions Board has asked the government to give scheme members the legal right to receive this information automatically. Meanwhile actuaries will encourage trustees to share the information with members on a voluntary basis.

The consultation period runs until 10 September 2003. The revised Guidance Note is expected to become fully operative by the end of 2003.

Action on Green Paper proposals

Green Paper proposal	Developments
Member security
Better protection when schemes are wound up and employer insolvent.	Legislation to be introduced establishing a Pension Protection Fund. Views being sought on level of benefit cap on protection.
Better protection when schemes are wound up and employer solvent.	Currently conducting limited consultation on draft Regulations requiring solvent employers to buy out benefits in full. Refunds of surplus disallowed unless schemes funded to buy-out level. Provisions to take effect as soon as possible. Actuarial profession consulting (ends in September 2003) on revised Guidance Note.
Replace OPRA with a new proactive regulator.	OPRA working towards taking on new role.
Revise statutory order of priority on winding up.	Draft Regulations expected summer 2003, to take effect in autumn, basing priority on length of service.
Extend TUPE to pensions.	Proposal is now for employers to match members' contributions to stakeholder pension up to 6%.
Place pension schemes higher up creditor order on insolvency.	Appears to have been dropped.
Vesting of benefits for service of under two years.	Proposal is now that employees with three months' service must be offered transfer to another scheme.
Requirement to consult with employees on scheme changes.	Consultation planned on implementation of EU Information and Consultation Directive in summer 2003.
Trustees' duty of care laid down in legislation.	Legislation will provide for trustees to be familiar with all "relevant" issues, not just investment.
Employers possibly able to make membership compulsory.	Idea dropped.
Simplifying pensions for employers
Replacement of minimum funding requirement with scheme-specific funding.	Intention to legislate confirmed.
Easing of s.67 of Pensions Act.	To proceed, but without restriction on value of benefits converted to new form.
Drop requirement for spouses' pensions for contracted-out schemes.	Requirement to be retained.
Drop requirement for LPI.	LPI to be capped at 2.5% a year.
Procedures for appointing MNTs to be simplified.	Minimum requirements to be in legislation backed by guidance from new regulator.
Contracting out simplified, including GMP reforms and revised reference scheme test.	Number of relaxations of contracting-out rules announced; no mention of reference scheme test changes.
Internal dispute resolution procedure to be revised.	To proceed, but no further details at present.
Easing of disclosure requirements.	To proceed, but no further details at present.
Tax simplification, including abolition of existing regimes and introduction of lifetime limit.	Further consultation expected autumn 2003, implementation delayed to April 2005.
Requirement to offer AVC facility to be dropped.	To proceed, but no further details at present.
Clarification of Pensions Ombudsman's jurisdiction.	To proceed, but no further details at present.
Simplification of pension sharing on divorce provisions.	To proceed, but no further details at present.
Planning for retirement
Employer task force to share experience and offer innovation.	Members of task force announced.
Extension of pension forecast statements to all schemes.	Defined-benefit schemes will have to issue annual benefit statements to members with a forecast of benefits.
Combined pension forecasts to be extended.	If voluntary approach does not work, government may legislate.
State pension forecasts to be made available automatically.	Programme of providing these forecasts for self-employed began in May.
Online retirement planning tool to be developed and all employers to provide pensions information.	First element of web-based tool to be ready in 2004. Pilot scheme to be pursued to evaluate different forms of pension information.
Minimum age at which pension may be taken to be raised from 50 to 55.	To take effect by 2010.
Age discrimination legislation planned.	Consultation in summer 2003.
Raising normal retirement age under public sector schemes to 65.	To be introduced by end of 2006 for new staff.

REACTIONS TO DWP'S "ACTION ON OCCUPATIONAL PENSIONS"

"The NAPF supports the government's moves to boost fragile public confidence in the occupational pensions system and to strengthen the security of scheme members. In order to build on this positive step, we now need to address the issue of incentives to employers that already provide workplace pensions, and encouragement to those employers that are considering setting up schemes to do so." (Christine Farnish, chief executive, National Association of Pension Funds)

"We welcome the acknowledgement that pensions are a partnership between employers, unions and employees. However, on balance we feel more may be needed to address the current problems faced by defined-benefits schemes and the pressures on employers to cease such provision. While the PMI does not promote either defined-benefit or defined-contribution schemes as being intrinsically superior to the other, we do not believe that the government's proposals contribute to a levelling of the playing field." (Pensions Management Institute)

"The ongoing concern we have about an insurance scheme is not only the extra cost burden - particularly as the government will not stand behind it - but that it may result in the better funded occupational schemes subsidising the weaker funded schemes which wind up with an insolvent employer. We remain concerned at the 'moral hazard' issue involved whereby, for example, the possibility remains that companies may be able to restructure their business to leave an underfunded scheme with an insolvent company." (Gordon Pollock, chair, Association of Consulting Actuaries.)

"We are disappointed that the government has chosen to allow employers to cut inflation proofing for members. This could result in workers in retirement seeing the value of their pension reduce significantly if we return to a period of high inflation. The need for compulsory contributions to pensions becomes more evident as we see the government trying to juggle with the voluntary approach. Long-awaited pensions protections should not be paid for by reductions in benefits - we need more money in the pension pot." (Brendan Barber, general secretary, TUC)

"We will examine any proposals with an open mind, but if we make pension schemes too costly employers will not be able to provide them. It will also be important that employers with good schemes do not subsidise those with weak schemes. Companies with strong schemes will be reluctant to pay for those without." (John Cridland, deputy director general, CBI)

"Employers under pressure to abandon their schemes will be hit hard. The option to cut and run now comes at a price. This price is that employers are now liable for their share of a potential shortfall in UK pensions of some £300 billion . . . It is important that the Pension Protection Fund (PPF) should be funded adequately, or else it will build up its own deficit before too long. If the PPF should suffer a deficit, employers or the taxpayer will have to meet the shortfall." (Wendy Beaver, deputy chair, Pensions Board, Faculty and Institute of Actuaries)

"We believe public funds will have to be committed in one way or another if a pensions crisis in this country is to be avoided. Unless the government takes the bull by the horns, the pensions Green Paper is in danger of achieving very little." (Mary Francis, director general, Association of British Insurers)

"Whilst the government has gone some way towards addressing employers' concerns, the continued absence of a clear timetable for reforming MFR and the potential devil in the detail will leave companies fearful of unintended consequences and potential extra costs." (David Yeandle, deputy director of employment policy, Engineering Employers' Federation)

"The changes in security will go some way in restoring confidence in the pensions industry. Unfortunately, reducing the inflation cap from 5% to 2.5% will have a disproportionate effect on the low-paid. It will make it more difficult for them to save for retirement." (Glyn Jenkins,head of pensions, Unison)

"Where a solvent employer winds up a scheme, trustees will be placed in an impossible position if employers can limit their responsibilities by claiming, as the government says, that the company would be put at risk." (The Work Foundation)

"Only 38% of women of working age have an occupational pension, so the majority will not be affected by most of the reforms the government has announced today. In the longer term, it must be a priority to increase the number of women in occupational schemes. The EOC still believes there is a strong case for compelling employers and employees to contribute to a pension scheme." (Julie Mellor, chair, Equal Opportunities Commission)

"Reducing inflation-proofing on company pensions will be a problem if inflation rises. Making company pension schemes more affordable for employers in this way reduces the risk of schemes closing, so could be a price worth paying. But the impact of this change could make decisions about joining a company scheme much more complex. Easy access to clear information and advice on saving and pensions will be even more urgent as a result of today's action on occupational pensions." (Ed Mayo, chief executive, National Consumer Council)

"[We urge] the government to give the whole pensions system an overhaul. In particular, we are calling on the government to address the poverty faced by thousands of women pensioners." (Gordon Lishman, director-general, Age Concern)

"If the government thinks the action it has proposed today solves the pension problem then it either doesn't understand what the crisis is or it lacks the political courage to deal with it. Many changes apply only to current employer schemes, and the simple issue that we are not saving enough is being side-stepped." (Sheila McKechnie, director, Consumers' Association)

¹"Simplicity, security and choice: working and saving for retirement, action on occupational pensions", Cm 5835, available by telephoning 0845 7 023474, free, and from the website of the DWP (at www.dwp.gov.uk/consultations/consult/2002/pensions/index.asp ).

²"The future of UK pensions", reply by the government to the third report of the Work and Pensions Select Committee, session 2002/03, HC92-I, available from the DWP website (at www.dwp.gov.uk/consultations/consult/2003/select-resp/response.pdf).

³"Draft Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc) (Amendment) Regulations 2003", consultation on draft Regulations, available from the DWP website (at www.dwp.gov.uk/consultations/consult/2003/ops/ops.pdf).

Commentary and insights

Government focuses on pension security

Was this article helpful?

About this resource

Templates

When To Include