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.

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.

Now we all know that pensions are difficult. That’s why my clients pay me very reasonable fees to sort it out for them. The National Employment Savings Trust (NEST) have just published their research paper showing that its target audiences don’t understand many of the terms and phrases used by the pension industry and have produced a ‘phrasebook’ to help raise levels of understanding. I don’t know how much they paid for that piece of research but I (and any one else involved in pensions) could have told them that for free!!

On the whole I’d give it a B for effort. As others have already pointed out (thanks Mike Jones of My Company Pension) here’s just one example of the old and the new. A Pension Commencement Lump Sum becomes A Cash lump sum taken when you purchase a retirement income. Why use 4 words when 11 are so much better…not!! But maybe I’m nit picking here. If this begins to improve member and employer engagement (ooh wait, not sure I’m allowed to say that… just a mo while I check…no that’s fine) then hats off to them. If you want to participate in their Plain English Forum just go onto the NEST website where you can also play their version of Angry Birds…don’t think it will be appearing on an Iphone near you soon though!!

Meanwhile, the Government has confirmed that the Default Retirement Age is to be phased out by October. On the one hand I can see that at 65 many people are more than capable of continuing to work and indeed may economically have to do so. On the other hand, there are also the younger generations to consider and they must be able to access the job market too. (Hold on…may not be able to say ‘access’ – nope, it’s on the banned list…er..) they must be able to get a job too. And for many who might have had hard physical jobs, they may not be able to work beyond 65.

From the pension perspective, most schemes will of course have a Normal Retirement Age at which members of the scheme can take their pension. This gives the scheme some certainty in its funding plans – I’m talking mainly here about DB schemes of course, but equally for DC arrangements, the Employer will have to continue fund contributions on an open ended basis. Arbitrarilly stopping pension contributions at a given age could now perhaps be challenged and scheme rules will have to be carefully analysed to see just what the position is and just what Employers can realistically afford.

I suspect the Law of Unintended Consequences may just have one more clause up it’s sleeve to bite us.

Now that the dust has settled a bit on the excitement of the Auto Enrolment announcements of last week, I thought I might just sit down and try to understand a little bit more about what the proposals might actually mean in practice, particularly for small to medium sized businesses. I’m not addressing the really small employers here – those with just a few employees and who previously provided no pension provision. Yes, it’s true that they will for the first time have to look at this, but generally, they will probably just auto enrol into NEST and be done with it.

No, I wanted to think about the employer who might in fact already have a pension scheme for its workers and what AE might mean for them. And while doing so, my euphoria at the good intention behind the policy of forcing people to save for a pension slowly turned to despair as I began to realise that once again, we have probably managed to make it the most complicated, expensive process that we could possibly have come up with. ‘ Why?’  I hear you ask. Well, here’s just a sample.

Let’s assume you are an employer with an existing DC scheme and you have perhaps 250 employees, 100 of whom are actually in the scheme because the other 150 either didn’t wish to join or opted out of joining. Along comes your AE staging date. You now have to:

1) work out if your scheme falls within the definition of Qualifying arrangement which will require you deciding which of the 3 definitions based on contributions and pensionable pay your scheme falls into.

2) work out whom of your workers fall within the jobholder definition who require to be auto enrolled ie, are they between 22 and state pension age – itself a movable feast – are they earning at least £7425 per annum etc

3) write to all those eligible (including those already in your eligible scheme even though you don’t have to do anything about them but especially also to those who aren’t in the scheme based on a strict regulatory process as to the information to be provided and woe betide if you get it wrong

4 )auto enrol any eligbile jobholder who isn’t currently a member and make sure that they ’suffer’ the pain of seeing a pension deduction before they can opt out.

Ah, opting out, now there’s a topic. Let’s just look at this shall we? Individuals can of course opt out – but first they must be ‘opted in’! An employer must ensure that jobholders are told all about auto enrolment including the right to opt out (see 3 above)  but they cannot do anything that would encourage jobholder to actually opt out nor can they provide a form to make life easier for them should they wish to do so. The Scheme can provide a form but then the jobholder must return this confusingly not to the scheme but to the employer who must also make the necessary returns to the Pension Regulator. Still with me? And the employer must do NOTHING that requires any action on the part of the jobholder. So, he can’t ask them to fill in a form with their basic information in order to facilitate membership administration (though a third party administrator can and perhaps if the scheme admin is done in house but that’s not really clear) and the jobholders must not be asked to select any options – although of course they can be given options but only as long as its after they’ve been put into the default position first. I think it was at this point that I started to lose the will to live.

But I shouldn’t complain I suppose – there is no way that even sophisticated employers of this size will work their way though the mire without professional help. No one said it would be easy but did it have to be this bloomin’ difficult?  Hello, can I be of any assistance…?

So, we pretty much now know that Auto Enrolment is going ahead as is NEST. A couple of concessions seem to have been made in that the minimum salary level for AE is rising to £7500 (which is about half the National Minimum Wage) and there will be a 3 month transitional period before AE needs to commence for new employees.

The re enrolment process every three years is likely to be simplified as will the tests for Qualifying Schemes which may be of small comfort for Joes Garage down by the ‘lock ups’ who will still need to go through the rigmarole of enroling Fred ‘n Bob the mechanics to whom he’s paying NMW but who don’t know they can ‘opt out’ as they’d rather put food in the wee babbies mouth than worry about retiring in 40 years time. And anyway, by then, they’ll be recieving that lovely ‘Citizens Pension’ of £140 per week. No matter how small your business, you are going to have to go through the process.

Cynical moi? Yes, but in fairness, the proposals are an improvement on what we had before…maybe I shouldn’t knock it just yet. But it will be interesting to see just how many lower paid workers actually DO opt out of making any further pension provision. The spirit of Stakeholder may just have the last laugh.

I’ll update this as more information on the detail comes through…

Later: The Minimum monthly contribution will be £11.70 and contributions will be based on earnings above £5715. So for someone on low earnings the minimum going into NEST per year from their own pocket will be £140. Even when the Employer contribution is factored in this will buy a very poor pension indeed come retirement!!

Well back from my holidays and time to catch up with what’s been happening in the wacky world of pensions! The ‘honeymoon’ period of our current Coalition Government seems well and truly over and as we approach Conference season, the militants are flexing their muscles. Despite a new offer to their members, the BBC pension arrangements look set to provoke a strike by members of Unite and BECTU leading to the blacking out of the Conservative Meetfest.

This will not be the only industrial action over pensions I suspect. The TUC has said that public sector pension reform is in meltdown and has become a ‘critical issue amongst unions’. While I have on other fora called for more active involvement by citizens regarding their pension arrangements, this was not exactly what I had in mind I confess. Witholding labour that leads to further financial difficulties for one’s employer is not frankly the best way to find a solution in the current economic climate. Mind you, the BBC deserves a good kicking but for entirely other reasons!!

As I write this, the Work and Pensions Select Committee is due to meet to discuss the 2012 reforms. We expect that Auto Enrolment will remain but perhaps with some modifications so that a window before enrolment will apply rather than immediate on employment. NEST will essentially remain as is – more’s the pity – if anything needed a radical rethink that was it – but yet again, a government may have chosen to ignore the well argued comments of those in the industry in favour of some ‘policy adviser’ who has never been involved with the actual running of a pension scheme in their lives but is great at getting appointed to government think tanks.

But perhaps the most worrying news item of the week is research from Baring Asset Management which has revealed that 47% of women who are not retired do not have a pension. The total number of women who have yet to retire without a pension is increasing year-on-year, and clearly more needs to be done to ensure that women do not end up retiring in poverty and dependent on State benefits (which of course, they probably won’t actually get since NEST will take them out of means tested benefits and the State pension will be worth the price of a lettuce leaf-) oops!

Although it is really something of a statement of the bleedin’ obvious, PwC have recently issued a report which after extensive (and no doubt extremely expensive) research has concluded that Final Salary Pension Schemes will have ceased to exist within 10 years. This is not exactly ground breaking news to those of us within the Pension Industry who have been watching the death throes for several years now.

It does seem however that the pace of change is escalating and frankly this is no surprise either given current economic circumstances, the open ended cost and volatility of running such schemes and the legislative complexity of complying with the over burdensome regulatory regime.  (Oh and Obama’s ridiculous grandstanding over BP significantly reducing the value of our pension funds – when he clears up Bhopal he might just have the moral high ground!!) And that’s before one factors in increasing longevity of members (in other words, we’re all living too long for the actuaries to keep up) and the soon to be introduced reforms in 2012 (I say this with some caution since it is just remotely possible that NEST will be spiked as many of us in the Pension Industry hope…at least in its current form)

But the one area that the report flags up which should be of concern is the fact that employees are simply not saving enough for retirement. 60% of people won’t be able to retire at all due to lack of savings. Yet the previous Government (and this one too if they don’t do something about it) think that an 8% contribution into a monolithic money purchase scheme will be sufficient. Actually the figure that will be invested will be a mere 5.7% after the set up levy and management charges are taken off. Here’s a bit of advice that didn’t take a lot of research – IT ISN’T ENOUGH!!

It is no wonder that employers are incentivising their employees to transfer out of the DB arrangement into something less costly. Someone needs to get a grip of the Pension arena. Who will be brave enough to do it I wonder?

A couple of bits and pieces this week to blog about. First the recent decision of the European Court of Human Rights dismissing an appeal by expat pensioners that they had been discriminated against because their pensions had not been increased in the same way as pensioners who remained in the UK.

This is an extremely long running 8 year saga, originally brought by a Mrs Annette Carson, who had moved to South Africa several years ago. She and a group of other expats, argued that their UK State pension should rise with inflation each year. They failed at every court both in the UK and now in Europe. Inflation proofing does apply to some expats who happen to have retired to sunnier climes in the EU (and in the US) but not for those in South Africa, Australia and Canada. The Courts consistently agreed that although the pensioners may well have continued to pay National Insurance Contributions for some time after leaving the country, NI contributions are not exclusively linked to state pensions. In particular, since they didn’t contribute to the UK economy and paid no UK tax to help offset the increases (which could amount overall to £500 million a year), there seemed no reason to extend the inflation proofing to those pensioners.

This comes as no great surprise to those of us who have been following the story for some time. The only shame is that no one had the guts to say to the pensioners after the House of Lords and the European Court had both rejected the claim ‘Look darlings, you have no chance of success. Just give it up as a bad job and enjoy your Pina Coladas…”

Next, a return to my favourite current bugbear, NEST. The Government have just announced that the scheme will be funded by a 0.3% annual management charge plus a charge on contributions of around 2% until the costs of setting the scheme up have been met. Sneaky to say the least, and the net result will be that the low to middle earners who will be the majority of NEST members will immediately lose a significant chunk off their already meager pension savings. It is likely to take 20 years or so before the costs are recouped so a whole generation will lose out. Nice one DWP.

In the past, most of my blogs have been about the sorry state of the Defined Benefit pension scheme and its probable inevitable demise at the hands of poor regulation, economic circumstance and Government interference.

I thought this week then, it was time to look at the bright new future (which for these purposes is not the dreadful NEST) but the Defined Contribution or Money Purchase Scheme. This has for some time been the option of choice for employers who want to be seen to provide a decent workplace pension arrangement but without the downsides of costs and deficits which can grow to the size of the gross domestic product of a small country!!

A DC scheme provides benefits based directly on the contributions going in which are usually invested in the stock market or within various funds provided by an Insurance Company with varying degrees of risk depending upon the underlying asset classes. All risk however is firmly on the member of the scheme since the employer has no liability save in respect of the agreed employer contribution rate. If the member chooses to place the whole bundle into a fund invested solely in third world debt instruments then tough if the resulting pension is only just enough to buy a tankful of petrol every 2 months or so.

Extreme? Perhaps, but recent trends are suggesting that DC pots have fallen by nearly £20 billion in just 2 months.

There are probably several reasons for this but one of the most important I suspect is that most members of DC schemes do not actively manage the funds within which they are invested. Instead, they rely on the ‘default’ fund that will have been selected on their behalf which will usually be a pretty safe low risk kind of affair.
But the downside of such funds is their relative lack of performance. This may be fine if you are in your late 50’s with perhaps a working lifetime of DB savings to fall back on but pretty lousy for a 25 year old who can afford a riskier investment strategy due to the number of years available to put right any poor performance over a couple of years or so.

But financial education in the UK is failing whole generations of people who struggle to understand even the most basic differences between stocks and bonds. With a State Pension system creaking at the seams now, goodness only knows what will happen when these generations come to retire with little to show for a lifetime of working save a NEST egg and a pittance from the State.

We need to raise our game, in realising that if we are going to have to be responsible for our own financial futures, that we have the knowledge, and skills that will enable us to make informed choices. And that starts with the young – assuming that they are able to count beyond 20 by the time they leave school that is. I wish I could be confident of that one!!