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.

Well, what a day it’s been. First, the Government has just annouced the result of its review of the way pension contributions are to be taxed, especially in relation to high earners. The previous administration had proposed an impossibly complicated way of ‘bashing the rich’ which the Coalition immediately on entering office decided to scrap. After the appropriate period of *ahem* consultation they have just announced that the previous £255,000 annual limit on tax relieved contributions is to be reduced to £50,000

In reality, this is rather better than the industry had hoped as initially, an even smaller cap of £30,000 was being mooted which could have potentially caught significantly higher numbers of people and could have had the counter productive effect of reducing the numbers saving into a pension. Before the Daily Wail starts bleating, let’s just be completely clear what this actually means. For Mr and Mrs Average, the thought that they would be able to afford to squirrel £50K a year into their pension scheme is – frankly – laughable. If we take an average annual salary of say £30K a year with a contribution rate of (say) 10% this only equates to £3000 a year. Even if matched by an employer contribution of similar amount you’d have to be going some to hit the cap.

So in fact, the only people likely to be really hit are those very high earners for whom pension saving is only a small part of their overall investment strategy. High net worth individuals will no doubt find this something of an irritation but hardly the end of the world as we know it. All in all, I think this is not a bad compromise.

And on the same day, in the Bonfire of the Quangos, it’s announced with some fanfare that the Pensions Ombudsman and the Pension Protection Fund Ombudsman are to merge. Well, stop the press. Did someone not bother to tell the Government that in reality, these two bodies are already encompassed in one organisation so there will be absolutely no saving whatsoever. What a waste of time. But the good news is that TPAS is saved. Just a pity that NEST was too!!

Well, it’s not been the most exciting of weeks in the pension universe but I suppose the big story – well big for us pension junkies – is the announcement made by Angela Eagle that the Guaranteed Minimum Pension element of a pension will have to be equalised for men and women.

In fairness, she did state that this would only apply in respect of schemes falling into the Governments ‘junior’ lifeboat, the Financial Assistance Scheme, but there are few of us who believe that the principle will not be extended to the ‘big’ lifeboat, the Pension Protection Fund and from there to all schemes that carry GMP’s for their members, that is, those who contracted out of the second limb of the state pension arrangements.

We have always known in our hearts that ever since the Barber judgement of the 17 May 1990 which first required the equalisation of benefits in pension schemes, that GMP’s would one day need to face their ‘day of judgement’ too. The problem is that GMP’s are inherently unequal, based as they are on State Pension Ages which currently are 60 for women and 65 for men – although of course this is gradually changing. No one has provided any real guidance for schemes on how they are supposed to equalise these benefits which up to fairly recently have been another file in the ‘it’s a bit too difficult’ basket at the Department for Work and Pensions. The PPF has consulted on how it would like to see it happen and this may well prove to be the model that schemes will have to adopt.

But, and it’s a very big but, this additional burden on schemes will not be an easy one for them to bear in these days of deficits and recovery plans. Actuaries are pulling their hair out trying to understand just how schemes are now to be valued given this additional tranche of liability. If the GMP is to be equalised with effect from 17 May 1990 one can only imagine the howls as millions are added to already overburdened employers’ contributions.

All we have so far is an announcement of course with no detail or even an inkling of how the process will work in practice and certainly no legislation yet. Opening one’s mouth without engaging gear in brain is seemples Ms Eagle. Now let’s see if you can put your money where your mouth is – or will you leave it to your successors to sort out?

The death rattle for DB schemes grows ever louder.

I went to an excellent talk by Lindsay Tomlinson the Chairman of the NAPF last night. The man talks a lot of sense. The main thrust of his speech was concerning the now certain death of the the DB scheme and the rise of DC and with it NEST eggs.

It is now an acknowledged truth I think (and so does he) that DB will be a creature of history within the next 10 years or so except within the public sector. That is not to say that there won’t still be legacy schemes in run off of course but the writing has been on the wall for them for several years, accelerated perhaps by recent economic events but certainly not helped by overregulation, poor investment choices and increasing longevity.

The future is DC but this does not come without its dangers. The movement of risk from employers and onto the members is a path fraught with danger. While contract based schemes may be able to shift some of the responsibilty away completely, trust based DC arrangements will still require considerable knowledge and skill on the part of trustees in selecting appropriate funds and in particular the default option which – let’s face it – will be the main option for most employees who are not financially savvy – and that’s probably 90% or more of the population. One can almost write the headline in the Daily Wail at the first sign of a misselling scandal or the realisation that members’ retirement fund expectations have been wildly overinflated. Lindsay mentioned a frightening ‘vox pop’ video he had seen where the prevailing view of the ‘man in the street’ seemed to be that for a 30 year old a £10 per month contribution would provide a £20,000 p a pension. It would be funny if it wasn’t so very sad.

And what of NEST? The Government takes the view that this is the answer to the pension problem in this country. It is the project that they have spent all their recent energies in pursuing probably to the detriment of other aspects of pension legislation that are just that bit ‘too difficult’ to deal with. We know that research is showing that employers will almost certainly take the cheapest option they can – paying the minimum contribution they can legally get away with. Even at the ‘maximum’ 3% and the total 8% contribution going in, a significant proportion of the target population may well be worse off in NEST than had they simply relied on State Basic pension only, together with means tested benefits which will be lost if they go into NEST.

The answers? If I knew that, I’d be making a hell of a lot more money than I am now!! What is apparent is that risk sharing schemes are dead in the water as far as DWP is concerned. Everything in the NEST is rosy. Except dear politicians and civil servants…it really isn’t.