Avid readers of Professional Pensions may have seen an ariticle in the 6th September edition regarding the case of Waddy v Foster Wheeler (yes, THAT Foster Wheeler – just can’t seem to keep out of the pension press can it??). I was asked to comment on the case just as I was rising from a Magistrates’ court sitting so I’m not sure my thoughts were fully cogent at the time!!

The significance of this case is that it concerns the rights of gay couples in a Civil Partnership to the same pension rights as heterosexual spouses. Now you may have thought that all this was sorted some time ago with the passing of legislation back in 2005 and it’s reenactment under the Equality Act 2010. But the more techically minded amongst you will also remember that there was an option available to schemes to only “equalise” benefits which accrued post December 2005. And that’s what many schemes did of course – largely to control costs for which funding had not been provided prior to then.

It seems (although in fact aspects of this case have settled outside of court so there is no formal trancript of events) that Foster Wheeler did not provide full benefits for Civil Partners. Mr Waddy and his partner Mr Skipp had been together for 40 years and entered a CP in 2006. The scheme having taken advantage of the exception has now agreed to provide full benefits in this case but maintain that the scheme rules were entirely lawful.

Liberty who took the case on Mr Waddy’s behalf continue to maintain that the Equality Act exception is unlawful both in respect of EU law and under the European Convention of Human Rights. The point will be argued further in an Employment Tribunal in January 2012 and we await the outcome with interest.

I have to admit that even when the legislation was first passed, I did just wonder whether the temporal limitation would ever be challenged. Now it seems that it is, I suspect that if Liberty lose at the ET, that won’t be the end of the matter. It is amazing that in the second decade of the 21st Century we should still be in doubt as to the intent and validity of equal rights. But that’s pensions for you. Why make things simple when it’s so much fun to make it complicated…

An article in the Times today (20 Jun 2011) has raised the issue of the development of a two tier occupational pension being provided by companies. Those of us well versed in the machinations of the UK pension industry would probably say ’so what else is new’ but maybe for some readers of this blog, it needs a bit more explanation. So here goes:

As we all hopefully know, starting from 2012, employers will be required to auto enrol qualifying employees into some sort of pension arrangement and pay contributions into it. For many particularly smaller employers, this will be something of a shock if they have never had to contribute to a pension scheme in the past. For the very smallest companies, there will be a default option called the National Employment Savings Trust or NEST. For others, they may wish to simply use their existing arrangements (if they have one) as long as it qualifies by providing a certain minimum standard of provision especially contribution rates. But many of the medium to larger companies particularly in those industries that have a high turnover of staff may suddenly be facing a vastly increased bill as more employees who may not have been ‘eligible’ to join schemes in the past (or indeed may not have wanted to) suddenly do.

So, what’s the answer? For some, it would seem to be to establish a type of ‘feeder’ arrangement whereby a scheme is established providing only the bare minimum that it needs to in order to qualify. Only if an employee stays for a given period of time will they then be able to join the main scheme that provides a far greater level of benefit and contribution. Or they may be offered NEST for perhaps the first couple of years – again providing a fairly meagre level of pension savings but better than nothing at all.

For those with a work history of low paying peripatetic employment, the reality of retirement will still be pretty poor. But it will still be better than reliance on the State. And for the employer, perhaps a more manageable cost. There are a few other ideas being bandied about too including setting up industry wide schemes akin to the Dutch model.

But more worrying of all is the lack of engagement and communication at the moment together with a certain amount of ostrich like behaviour!! 2012 is getting closer all the time and while for some, the staging date process will mean a formal start date of 2015, it can take well over a year and maybe closer to two to get things up and running. The time to start planning is now.

We’ve had some meat on the bones of the Hutton proposals today with a statement from Treasury Minister Danny Alexander too. You can read my earlier thoughts on Hutton in my blog “Hutton Speaks…and Makes Sense” below. But despite this, the knee jerk reaction of the Public Sector unions is, to paraphrase the late Miriam Karlin’s character Paddy, “Everybody Out”

The Government have now guaranteed that despite scheme pension age rising from 60 to 66 to logically coincide with State pension age rises – and dare I say it, most private sector pension arrangements – low paid public sector workers on less than £15000 will not have to pay contribution increases and those earning less than £18,000 will have a capped contribution rate of only 1.5%. Obviously, all benefits earned up to the date of any change will also be unaffected.

My very clever actuarial friends also assure me that many of the lowest paid – and those likely to remain so, will in fact probably be BETTER off under the Career Average model than under the old Final Salary scheme which tends to favour high earners or those with a steep career progression. Reform is clearly needed – that much is obvious, at least to most of us who have a memory longer than that of a flea and who remember the ‘Dear Chancellor – there’s no money left’ note from the previous administration as they walked out the door. So are the unions deliberately misleading their members to ferment discord or are they just badly advised? You tell me…

In an earlier life I was the Legal Director of the Occupational Pensions Regulatory Authority, the predecessor body to the current Pension Regulator. One of the issues which took up a considerable amount of management and investigatory time concerned a scam called ‘Pension Liberation’. It worked like this.

Gullible people desperate for cash would be encouraged to transfer out of their safe often well funded DB scheme into a ‘fake’ pension scheme, set up by the scammers. At it’s most sophisticated, they would even be given false contracts of employment so that the Inland Revenue (as it then was) would think that there was a genuine occupational scheme. For a significant fee, the ‘employee’ would then be given a cash sum out of the scheme – all totally illegal of course. The scammers had up to 50% of the transfer value, sometimes more as the admin fee, the ‘member’ got his hands on some cash but at a significant cost. And when the Revenue finally caught up with them, as they inevitably did, a massive tax penalty to boot. So most of pension savings could be lost leaving the victim ‘member’ to a very poor old age.

Prosecutions supported by OPRA at the end of the 1990’s largely put a stop to these scams, but sadly it appears that there is a new kid on the block albeit in another guise. They are called ‘Pension Reciprocation Plans’ and work by allowing people under the age of 55 to borrow up to half the value of their fund after it’s been transferred into a ‘Master Trust’ Pension Plan which – it is claimed – fall outside the legislation which would otherwise prevent members taking loans from their own scheme. Half of the funds – it’s only sold to those with a transfer value of £20,000 or more – no point going after the paupers now is it – are held in a highly risky unregulated property investment vehicle in a lax tax friendly jurisdiction such as the British Virgin Islands, the other half in a non tradeable fixed interest security. Initial fees are also high at 5% with an annual management charge of 1% and and interest rate on the loan of 5% over Bank of England Base.

As such it is not for the feint hearted and the financially unsophisticated, and while it appears to be ‘legit’ the FSA are being urged to look into these plans. If they came to me with this as a possible ‘investment’ opportunity I would not touch it with a 50 foot bargepole…and dear readers, while I am of course not authorised to give financial advice, I suggest you should think very very carefully if someone approaches you with this ‘too good to be true’ wheeze…it probably is.

After a bit of a break to recharge my pension batteries (lounging on a beach works wonders!!) normal service is resumed with a report of recent happenings in the pensionsphere.

I have just got back from a fantastic conference organised by Mallowstreet which was frankly unlike any pension conference I’ve ever been to. I loved the motivational speakers and the drumming session (yes really!!) was amazing once one got over the slightly cultish feel to the rhythmic beat.

But there was serious stuff there too. Worthy of particular mention was James Cameron on Climate Change Capital. His premise essentially was that pension schemes would do well not to underestimate the effect of growing scarce resources such as water, food and energy on the investment potential of asset allocation. Indeed, CCC should be considered a separate and valuable asset class of its own. People will kill over lack of water supply and being aware of the need to support new ways of doing things is vital if we are to avoid social and economic meltdown in the future. Now I am no ‘green goddess’ far from it – I am frankly a cynic when it comes to the causes of climate change – but much of what was said made sense to me, if not from a green perspective then certainly as another investment opportunity for growth.

Then of course there was the Pension Minister Steve Webb. A very good speaker it has to be said, and on the day when Age UK organised a march on Parliament to demonstrate against the rapid rise in womens’ State Pension Age, he again mentioned that the Government would ‘reflect’ on what for many women will mean an extra 2 year wait for their pension – a wait they can ill afford and for which they have had insufficient time to plan. Sadly I suspect the Treasury computer will say ‘No’ to any real change in the current proposal but we can but hope as the Pension Bill is delayed on its passage giving a potential opportunity for revision if the pressure for change is accepted. I’m not holding my breath though…

He also had words to say on Auto Enrolment and NEST – nothing we don’t franly already know but it was nice to actually hear an acknowledgment from a Minister that what we have at the moment is too complex, provided inadequate pension provision, and was a turn off to most people to save for their retirement. We know the problem Minister, now let’s find the solution.

Which brings me to the Debate section – will Defined Contribution ever be as good or better than Defined Benefit? Accepting as most of us do that DB is flapping about like a dying swan, DC remains the ’standard’ alternative. At the outset, the audience were pretty firmly in the No camp, but after some great discussion, at the end and with significant support for a collective DC solution, a small majority win for the Yes camp ensued. It was a ‘first past the post’ vote. We decided that adopting AV was just too difficult…!!

I also had the pleasure of doing another radio interview with Danny Pike at BBC Radio Surrey/Sussex yesterday. Here it is http://www.silverman-sherliker.co.uk/mp3/jkradio4.html and most of my other interviews with Danny can be heard from our main Silverman Sherliker website

Today’s big story of course is the Government green paper on the future of the basic state pension. Currently one of the lowest in the developed world it stands at a paltry £97.65 a week (assuming you have a full National Insurance record) rising to a minimum income guraranteed top up figure of £132.60 if you have no other income from other sources such as a company pension scheme.

But this minimum figure top up is means tested and it led to some of the neediest of our society failing to claim what they were entitled to. Many older people especially older women with incomplete NI records due to home care breaks, were of a generation too proud to go cap in hand as they saw it to some bureaucrat in the social security office asking intrusive and personal questions.

What is now being proposed is a flat rate simple £155 per week basic state pension, available to all new pensioners from 2015 irrespective of child care breaks. (Of course, another proposal mentioned in the Budget was the merging of income tax and National Insurance too so that all dovetails nicely if they can ever get the system to work!!).

There will be additional positives for the Government too in a subtle boost to the NEST scheme. Why? Simply this. NEST, while giving a pretty minimal outcome for an inadequate 8% contribution overall, would have been sufficient to remove people from qualifying for the means tested M.I.G. Consequently the view went, why bother to save for one’s old age when the government would provide anyway. Some pundits were predicting a significant opt out from NEST as a result. Of course, the best answer is adequate work place pensions but that’s another story!!

This Green Paper for once seems a very sensible simplification and is to be welcomed by all (though no doubt some will not). Iain Duncan Smith conceded what those of us in the pension industry have been saying for years. That the State pension system (in fact ALL pension systems in the UK) are just far too complicated and frankly are a turn off to saving. Yes it is unfair to existing pensioners who will not benefit from the change but as we know, the coffers are not bottomless. As Steve Webb said on BBC Radio 4

“Tomorrow’s pensioners do face a very different world. They will, on average, be working for a lot longer, they will be retired for longer, they won’t on the whole have final salary guaranteed pensions in the way that perhaps their parents did. We therefore need a simpler, clearer foundation because more of them will now be asked to save for their retirement.”

A further reform announced today concerns linking the increase in State pension age to increasing longevity. We already know that State Pension Age is to rise to 65 by 2020 And then gradually to 68 by 2040.

By providing automatic rises this will depoliticise the argument as it’s pretty tough to argue with science and the science tells us we’re all living longer. It’s a price we have to pay…get over it.

We have now had the full report which did not fundamentally differ from the Interim Report issued at the back end of last year. Workers will now have to work to 65, pay higher contributions and the final salary scheme will become a career average scheme, meaning that rather than a final salary figure being used in the pension calculation instead, a salary will be averaged over the working life so generally this will be a lower figure but actually fairer to most workers. The losers will be those who would expect rapid promotion over their working lives.

Why? Although this is not the main rationale set out in the Report, the reality is that simply the traditional FS scheme is unaffordable. We are all living longer so if pensions remain payable at 60 they will have to be paid for longer and the Govt has already announced an increase in state retirement age. Raising the age just makes sense. In addition it has proposed the removal of the default retirement age after lobbying from unions so it seems a bit odd that they now complain about having to wait a bit longer for pensions. Secondly, the taxpayers pocket is not bottomless and contributions from scheme members are historically lower than in the private sector. A member would have to find an additional 30% of salary to ‘buy’ an equivalent pension in the private sector. So essentially they are getting a 30% salary increase in pension contributions on a final salary basis. Not bad.

As far as a CARE scheme is concerned it is true that this is likely to produce a lower pension but this is still better than a pure money purchase arrangement which is often what is being put in place in the private sector as FS schemes are closed. The National Association of Pension Funds announced just a day or so ago that the closure of such schemes accelerated by over 17% the past year.

The howls of protest will be as predictable as they are wrong and there may well be marches and protest but I dont hear realistic alternative solutions being suggested. Remember that in London alone, the Local Government Pension Scheme is facing a £14.6 billion deficit. It is no longer the case that public sectors workers earn less based on the promise of a Final Salary pension. But if we are to avoid that ‘race to the bottom’ that Hutton wishes to avoid, we must do better than a Defined Contribution as they currently are. Come 2015 when these changes are due to bite, we may have improved the DC universe, but that’s by no means certain.

Last year dear readers you will recall that I made a few not very serious pension predictions for the year to come. As this will be my last blog for 2010, I thought why not do it again so here goes:

1 The Parliamentary pension scheme for MPs will be scrapped in favour of auto enrolment into NEST.

2. NEST will be abolished 6 months later after MPs suddenly decide that it is really not that great an idea after all and can we please have our nice DB scheme back again.

3.  The Index is to be revised again after the Government decides that CPI is no longer suitable on the basis that not only do pensioners not need housing costs to be factored in but also at that age they really don’t eat very much do they and a few more layers of clothes will sort out the heating problem. The new index will be called ‘the Zero Index’

4. The Euro reaches parity with the East Caribbean dollar. MEPs all decamp to Anguilla for the Winter.

5. The Pension Act 2011 comes into law and contains only 3 clauses and covers a mere 2 pages (this is obviously a complete fantasy so I apologise for teasing my readers this way!!)

6.  DWP simplifies the Auto Enrolment staging date regime from 24 dates to a far more manageable 53! Someone told them that Orwellian NewSpeak was a guidance manual.

If you’ve got any other predictions,why not share them here. A Happy Christmas and a Happy and Healthy New Year to you all.

To make up for the dearth of blogs over the past couple of weeks, here’s the second in two days!! Today boys and girls, we are going to talk annuities. The Government, in an effort not to let a day go by without some sort of pension announcement, are expected to call an end to the compulsory purchase of an annuity from pension savings by the age of 75.  What’s all that about then I hear you ask.

Well, as we all know, pension savings are a pretty tax efficient way of building up a fund for our retirement. They are tax free at the point of input (ie saving) but are taxed as income at the other end when we start to draw our pension. In order to ensure that HM Revenue and Customs get their fair share of your hard earned cash, you were required to buy an annuity so that you had some income to tax. An annuity is essentially an insurance policy that promises to pay you an income for life in return for a large chunk of cash when you retire. It’s a bit of a lottery really. If you buy an annuity at age 65 and sadly get run over by a bus the next day, that’s tough, the insurance company is laughing all the way to the bank since they don’t have to pay you anymore, and your family get nothing in return. Of course, if you are lucky to live until you’re 100 it’s the insurance company who may be crying since they’ve probably not gambled on you living so long and have underpriced the annuity. Swings and roundabouts though, and usually the insurers come out on top.

What the Government are now saying is this. They recognise that tying up your pension pot until retirement could be difficult for many who may wish to have access to those savings for good reasons, buying a house for instance before you become too old to enjoy it. They also recognise that many people wish to leave something for their families when they die and annuities would not allow that. However, they still want their tax take and they don’t want people to spend, spend, spend and then become dependant on the State in their old age. So people are going to be able to draw on their pension savings during their working life but there will be strict conditions attached to prevent them blowing it all on wine, women (or men) and song.

But with this flexible approach to retirement savings will come added complexity. And the reality is that for Mr and Mrs Average, an annuity will still be the right way to go. For them, it will guarantee an income in retirement. It is really only the wealthy who have other independent savings who are likely be able to take full advantage of these new rules. Reputable Financial Advisers will I hope steer away from selling unsuitable flexible lifestyle products from those who really should take the annuity option although for heavens sake, remember the Open Market Option for annuity purchase too.

Your favourite pension lawyer spent most of last week snowed in so has been a little remiss in posting but with the thaw comes the need to write so here goes.

This weeks bon mots concern the Government proposals to allow schemes to adopt the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) when calculating the amount by which pensions should increase each year. Now I can already hear the yawns but bear with me because this actually is pretty important. First, some background.

The Government announced earlier in the year that Public sector pension schemes were going to adopt the CPI measure and it was only a matter of time before private sector schemes would come under financial pressure to do the same. What does this mean? Well, each year, pensions in payment and those benefits of members who have left a scheme leaving their pensions behind until they come to retirement age, are uprated. Many schemes will have a rule that says something along the lines of ‘pensions will be increased by RPI’ or ‘by the Index’ or maybe ”by the lesser of x% or RPI’. Now RPI is currently running at about 4.5% while CPI is at 3.2%. A significant difference and one that will grow significantly over time. Clever actuarial types have already crunched the numbers and estimate that this could be as much as a 25% difference over the life of a pension.

Needless to say, the Consultation document which is due to be published today will try to cover these issues and I’ll probably post an update later when we know a bit more. The main thrust of the push seems to be that most pensioners will have paid off their mortgages by the time they come to retire and therefore the index does not need to account for housing costs. RPI is ‘volatile’ according to pensions minister Steve Webb and RPI includes those costs, CPI does not. But to me that is a spurious argument. For one thing, fewer people are and will actually be able to afford a mortgage, they are renting. Renting costs will not diminish and for pensioners, indexation as it is known is a vital part of pension provision.

For sponsoring employers, the temptation to save money in already underfunded schemes will be high, but things are not really that simple and the law may actively prevent reducing RPI if the scheme rules are drafted in a certain way. It will be contraversial and highly unpopular with the workforce.Trustees will need a great deal of advice on whether to agree to an employer’s request to amend the scheme and what the consequencies might be if they do.

Apparently the Government ‘didn’t realise how complicated the change actually was’. Why am I not the least surprised.

Update: The Government has announced that they won’t implement a statutory override permitting schemes to adopt CPI even if their rules would not allow it. So, chaos will rule, no one will win, not the Schemes, nor the members and Steve Webb can sit back and consider it a job well done. It isn’t…not by a long way