Pensions: Experts debate future of retirement provision
The CA, in association with AGL Group, brought together a panel of pensions experts to discuss where we are now and the way forward at a special round table event.
With an ageing population and a government looking to reduce its fiscal deficit, retirement provision has been a key focus of the past few years.
Chairing the discussion was Justin Corliss, employee benefits consultant with AGL Corporate Services. He began with the drift in workplace pensions from defined benefit (DB) to defined contribution (DC) schemes.
Stephen Davidson, client service director with human resources solutions provider Aon Hewitt, said that it is primarily the liability risks associated with DB schemes – driven by the low level of interest rates, volatility of investment returns and increasing life expectancy – that has been behind this trend.
He said: "There are SMEs [small and medium-sized enterprises] for whom the pension scheme is bigger than the business, so this is a significant risk to them. It's no surprise that many of them are looking to move from DB to DC schemes, but while the move addresses future risks it does not address their legacy risks. As employer you still have to think of a way to get out of that scheme, and unless you have a big chequebook you cannot do that in a short space of time."
Ruth Tobias, a pensions partner with Pinsent Masons, said that proposed transfers to a DC scheme tended to make trustees nervous. She explained: "Trustees are quite risk-averse; they don't like the idea of someone transferring their rights away and losing their 'gold watch'. There's a very real concern that people might take decisions that prove later not to be in their financial interests, so there's a balancing act between the interests of the scheme members who may well be better off where they are, and those of the company, which wants the deficit reduced."
Communication with scheme members is a key issue for employers. Juliet Bayne, pensions partner with law firm Brodies LLP, said that it is still unclear to what extent trustees are responsible for communication and, if so, what they should say.
She said: "Trustees are inclined to communicate rather than stay quiet… but what do you do, include something in the annual newsletter or send out a special communication?"
Steven Sweeney, an independent financial adviser (IFA) with AGL Wealth Management, said: "There will be unscrupulous advisers… there is a responsibility for providers and trustees to make sure those giving advice are experienced and qualified."
The cost of providing advice for scheme members is a concern for employers, but Graham Peacock, head of business development with Carey Pensions, argued that for many employees workplace counselling rather than regulated financial advice might be sufficient. He said: "It's about outlining options for what's possible. Employers would probably have to pay for an IFA's advice only for a few employees."
Pensions auto-enrolment (AE), which is still being rolled out to the majority of smaller companies, is an attempt to ensure wider pension provision by making it mandatory for employers, with an "opt-out" for employees.
Justin Corliss noted: "Before auto-enrolment, only 30 per cent of private sector employees had access to a workplace pensions scheme. How did we arrive at this situation?"
Graham Peacock compared the UK's late adoption of this approach with Australia, HK and Singapore where there has been compulsion for many years. He added: "Partly the problem has been that the UK political system hasn't provided stability, and there has been a quick succession of pensions ministers… they've danced around the issue of compulsion, and they've tinkered with the tax regimes, and we now have the most complicated tax regime around pensions and the most complicated legislative approach."
The discussion took place before the general election in May, and Peacock said that Steve Webb, pensions minister in the Coalition government, had provided some much-needed stability. Webb, a Liberal Democrat, has since been replaced by Ros Altmann, who will take up a seat in the Lords.
Louise McCosh, head of HR services with accountancy firm French Duncan, said that in terms of engagement with employees, in her firm's experience most companies had not been seeking to go beyond what was required of them. She said: "They work to their staging date, and they want to know what they need to do in order to comply."
Next year the rules will apply to a further 510,000 businesses, with around 610,000 the following year. As Graham Peacock pointed out: "This is just the beginning. There are 200,000 new incorporations of limited companies, with employees, every year."
Louise McCosh said: "Most SMEs don't have IFAs, so they turn to their accountant. The main issue for micro employers is that they have absolutely no resources to cope with this."
John Moffat CA, chairman of the ICAS Pensions Committee and a senior manager with Grant Thornton, noted that many smaller businesses are now audit-exempt and may not necessarily have an accountant to consult.
Steve Thomson, a forensic accountant and partner with the Rimmington Thomson Partnership, cited a package AGL had put together to cover both pensions and general financial advice. He said: "Rather than just talking about auto-enrolment, AGL engaged with the employee about their financial position and financial planning. It became a real strategic benefit for the company, to an agreed plan, paid by a fixed monthly fee."
Freedom and risks
Justin Corliss noted: "The pension industry is worth £4.7trn and the government expects to raise an extra £4bn over the next five years from its 'pensions freedom' measures. Is there a conflict of interest here?"
Savers are now allowed to take some or all of the cash in their pension pot, but if they do so it will incur tax as income. Graham Peacock said: "This is the quietest stealth tax ever introduced. If you take your pension pot as a lump sum, the government will take up to 45 per cent. That's almost half of your pension!"
Also, the panel noted, while AE aims to encourage people to save for retirement, the pensions lifetime allowance has been reduced steadily.
Christine Scott, Assistant Director, Charities and Pensions, ICAS, and secretary to the ICAS Pensions Committee, commented: "Government tends to work in silos; it needs to be more joined up. If it's felt that an 8 per cent contribution is not enough, you need to look at the overall cost of employment, including employers' national insurance, for example. We need to widen the debate to find a way of enabling people to save enough."
She added that the fact that the lifetime allowance is measured differently for DB and DC pensions leads to a sense of unfairness.
Graham Peacock said there is a risk, with AE, that some employees' retirement savings might end up in underperforming funds.
John Moffat said: "It will take a long while to see how all this unwinds, and there has to be regulation of the industry. New products and new ideas have to be monitored, so that we can have confidence that they will produce the outcome that's expected."
The panel agreed that it would also mean different professional advisers working together. As Steven Sweeney put it: "You want to put the client in the middle and build the team around them. Ten years ago you might not have seen that."