The Government's pension reform

Written evidence submitted by the Society of Pensions Consultants

INTRODUCTION

1) This submission is in response to the call for evidence from the Work and Pensions Select Committee, in advance of its oral evidence session with the Minister for Pensions, issued on February 4th 2011.

2) The call for evidence specifically invites evidence on:-

· The proposed accelerated increase in the State Pension Age (and particularly the impact on the change on women).

· The impact of the change to using the Consumer Price Index to uprate workplace pensions.

· The plans for auto-enrolment into workplace pensions schemes and the establishment of the National Employment Savings Trust (NEST)

3) This submission will address the second and third of these subjects. We have no specific expertise or views on the first.

INTRODUCTION TO SPC

4) SPC is the representative body for a wide range of providers of advice and services to work-based pension schemes and to their sponsors. SPC’s Members’ profile is a key strength and includes accounting firms, solicitors, insurance companies, investment houses, investment performance measurers, consultants and actuaries, independent trustees and external pension administrators. SPC is the only body to focus on the whole range of pension related services across the private pensions sector, and through such a wide spread of providers of advice and services. We do not represent any particular type of provision or any one interest - body or group.

5) Many thousands of individuals and pension funds use the services of one or more of SPC’s Members, including the overwhelming majority of the 500 largest UK pension funds. SPC’s growing membership collectively employs some 15,000 people providing pension-related advice and services.

IMPACT OF THE CHANGE TO USING THE CONSUMER PRICE INDEX TO UPRATE WORKPLACE PENSIONS

6) The principle, that the benchmark for benefit revaluation and indexation should be CPI, rather than RPI, has been clear for some months and, insofar as it offers an opportunity to reduce the costs of benefit provision proposed by government, is not unwelcome.

7) We recently surveyed our Members on this subject and responses were as follows:

"Following the Government's consultation on the impact of using CPI for pension indexation and revaluation and the publication of the Revaluation Order, do you think this is a positive move for the long-term viability of defined benefit schemes?"

8) However, the practical application of the policy change is fraught with difficulty. The pension industry is faced with the need to interpret a still open consultation document on the change, which was released some months after the change itself was announced, review scheme documentation and make decisions, probably with legal input, in order to make decisions on how to treat benefits coming into payment from January 1st 2011.

9) This was a very unreasonable situation.

10) The lesson we draw from this is that, even where a policy change can be viewed as a liberalisation, there needs to be close linkage between high-level policy setting and consultation on its implementation, which did not happen in this case. We would have liked to have seen the adoption of CPI for statutory rates of revaluation and indexation to have been delayed by one year, as soon as it became apparent that the government did not intend to make overriding changes to scheme rules to facilitate switching from the use of the retail prices index to the consumer prices index.

PLANS FOR AUTO-ENROLMENT INTO WORKPLACE PENSION SCHEMES AND THE ESTABLISHMENT OF THE NATIONAL EMPLOYMENT SAVINGS TRUST (NEST)

11) We acknowledge the government’s plans for auto-enrolment as a legitimate response to the need to increase pension saving among moderate to lower paid employees.

12) We also recognise that this carries the risk that the auto-enrolment of some individuals would give rise to the risk that the net outcome would simply be to substitute pension benefits for State benefits, for which they would otherwise have qualified on a means tested basis. It remains to be seen whether increases in the basic State pension, mooted by the government towards the end of last year, will reduce or eliminate this risk.

13) We welcomed the commissioning by the government of a review into making auto-enrolment work and the case for NEST.

14) We also welcomed the decision by the government to accept the principal recommendations. For example:-

· The increase in the earnings threshold, at which an individual is automatically enrolled into a workplace pension and its realignment to sit better with income tax personal allowances and National Insurance thresholds.

· The decision that there should be a simpler system, by which employers can certify that their defined contribution pension scheme meets the required contribution levels. Although we have yet to see the regulations, which would implement this decision, our discussions with DWP make us optimistic that a simpler system will be found.

· The decision to allow an optional waiting period of up to three months before an employee needs to be automatically enrolled into a workplace pension.

15) We also accepted the analysis by the review that NEST should go ahead as planned, to support successful implementation of automatic enrolment.

16) It is now essential that the detailed requirements on auto-enrolment are effectively communicated by the Pensions Regulator, particularly to smaller employers, who have no history of engagement on pensions provision, and who will probably not engage now beyond the minimum needed to meet their legal obligations, and for whom the Pensions Regulator will be a new body (the Regulator’s prime focus until now has been on pension scheme trustees).

17) If there is large scale non-compliance with the new employer duties on auto-enrolment, we would expect most of it to be the result of ignorance or misunderstanding and the role of the Regulator in ensuring that ignorance and misunderstanding is not widespread will be crucial.

February 2011