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.

Once again Europe has spoken and this time it’s the women who will pay – well sort of. The latest diktat from the ECJ has declared that it will no longer be legal for insurance companies to use sex based factors when pricing products whether that be car insurance, life insurance or (and this is the pension bit folks) annuities. I can hear my actuarial friends and colleagues sobbing into their modelling spreadsheets even as I type!

But in every cloud there is just the glimmer of a silver lining although that may to some extent depend on which side of the sexual divide you sit. The bad news is that almost certainly most insurance premiums for women will increase – I mean honestly, do you really think that premiums will be levelled down for men? There may just I suppose be a meeting in the middle but I doubt it.

Bur the good news for women is that ironically the cost of annuity purchase may fall. Why? Simply because in the past, since women on the whole live longer than men, the price was higher as they would be paid for longer. This will no longer be permitted as presumably the ECJ has decided that we will all live for the same length of time and nature can go to hell in a handbasket – an ecologically sound and politically correct handbasket of course. At least they have been generous *ahem* and we have until 21 December 2012 to sort out the mess they’ve left us with

But the reality of course is this. Women DO generally live longer than men. That is nature, it is not sex discrimination. And young men generally DO want to show off to their mates in souped up old bangers – that is statistically proven and those raging hormones just have to get an outlet somehow. Driving stupidly resulting in accidents seems to be one of them.

The only sensible way through this apparent dilemma might be to introduce individual pricing based not just on sex but on particular circumstance and statistical evidence. And that will come at a cost. But it is at least fair – something that the ECJ seems confused about. I will leave it to my very clever actuarial friends to work out the detail – my mathematical ability ends with the counting of my fingers and toes!!

Slightly hidden away in the bowels of the Daily Telegraph comment section is a piece about Wedgwood Potteries. Sadly this wonderful British institution has faced financial difficulties in recent years and as a result, the pension scheme has had to go into the Pension Protection Fund in order to be rescued. So far so sadly usual.

But the Wedgwood Scheme was a multi employer scheme and one of the employers was the Wedgwood Museum in Stoke on Trent – completely independent of the pottery company itself but with 5 employees who were members of the main scheme. So the Museum became a participating employer as it was required to be. And this is where the whole things becomes a bit unfortunate.

The scheme is what is called a ‘last man standing’ scheme. So any solvent employer who happens to be the last employer in the scheme stands to pick up the whole of the deficit of the scheme – the Section 75 debt. In Wedgwoods case, this is some £134 million apparently. Unsurprisingly this lovely Museum doesn’t have that sort of cash – or rather it does have some of it, but only if it sold off the precious artifacts it holds. And this is what the Pension Protection Fund is seeking an order from the High Court to do.

Needless to say, the locals are up in arms and the PPF is being accused of cultural vandalism by MPs and commentators which is in a sense quite true. It would be a terrible blow to a superb heritage were this to happen. I have no idea what way the Courts will turn in deciding this issue. But it would be wholly wrong to blame the PPF for taking this action. The PPF has a statutory remit to recover as much of the debt as it legally can from the companies or organisations liable to pay it.

If there is any villain in this piece it is the dreadful Section 75 Pensions Act 1995 which has never worked properly since it first hit the statute books and through several attempts to put it right. Those attempts have only led to further complexity and confusion and have acted as a break on genuine corporate activity. Oh yes, and in this case, it is simply unfair.

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.