Pension Schemes Bill

Written evidence submitted by Mercer (PS 01)

 

Mercer is a global consulting leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset - their people. Mercer's more than 20,000 employees are based in 42 countries, and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies, a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital.

In the UK, our client base includes employers and trustees providing occupational pension schemes to employees in all sectors of industry. We provide pensions advice and services to companies in the FTSE100, but we also have a larger proportion of clients that are employers classed as "Small to Medium sized Enterprises", or trustees of pension schemes with sponsoring employers in this class. Our response takes the interests of our diverse client base into account.

Summary

1. The new legislative framework for pension scheme design might lead to innovation in retirement savers’ interests. However, that is a long term aspiration. Our more immediate concern is with the consequences to the thousands of existing pension schemes, and this is the focus of our submission.

2. We implore the Committee to have existing pension schemes and their members at the forefront of their minds when scrutinising the Bill and throughout its journey through Parliament.

3. Not only does the Bill, in its current form, seem likely to rewrite a swathe of pensions legislation, but the distinction between "defined benefits schemes" and "defined contributions schemes" is not as stark as suggested in the Explanatory Notes (e.g. paragraph 6). There are already a lot of risk sharing arrangements within the defined benefit world. Imposing a new regulatory structure on these would be destabilising and, in some cases, result in employers placing more employees into defined contributions schemes.

4. If the Government wants a new regulatory regime for new scheme designs, it should apply it to new schemes only. Existing schemes ought to be able to continue to be regulated under existing law and to opt into the new regime if they see any advantage to it.

Introduction

5. We have considered the draft Pension Schemes Bill 2014/15 in detail and the way it interacts with existing legislation. My colleagues and I have contributed to the evidence submissions being put together by the industry and professional groups we are members of, which we understand will comment on the detail of the Bill’s drafting and whether it will work from a technical perspective. Also, the Bill is very high level, with much of its application depending on subsequent regulations and legal interpretation for individual schemes, and it is not yet clear what the implications will be for specific schemes. So, rather than commenting on the Bill’s detail again in Mercer’s own submission we will only comment on general principles.

6. In particular, we are concerned that the impact of the proposed legislation on existing pension schemes and their sponsors is being overshadowed by consideration for scheme designs which do not, and may never, exist.

Specifics

7. So far, there has been very little interest in "defined ambition" or "collective defined contribution" schemes from our clients. That may change in future, and we would welcome that, but the hard fact is that our clients’ focus is overwhelmingly on their existing schemes. These include risk sharing schemes, established and operated under the existing defined benefit regime, but the rising costs of pension provision have left many of our clients wary of setting up or continuing anything but defined contribution arrangements.

8. Furthermore, due to auto-enrolment, almost all of our clients have had to review their pension arrangements in the last few years. Most have put in place money purchase arrangements to meet their new statutory obligations and are now bedding in the complex auto-enrolment framework.

9. Although the relatively small proportion of schemes with ongoing, contracted-out accrual will have to review provision again in respect of the April 2016 changes, we do not envisage employers having much appetite to spend time and money putting in place new, potentially complex, arrangements that they may perceive as creating extra costs, risks and management burden for them.

10. In our view the level of demand for defined ambition schemes is far "softer" than the evidence quoted by the government suggests [1] . As Mr Webb himself said, "Understandably, firms are not queuing up to declare for this form of pension provision." Employers (and trustees) are likely to be more concerned with the effect of the Pension Schemes Bill on their existing schemes, than on what new schemes it might allow them to create.

11. The draft Pension Schemes Bill creates new "Categories of Pension Scheme". Although there might not be an intention to change the substance of regulation applying to existing schemes, the Bill cuts across and rewrites existing fundamental legislation, with perhaps unexpected, as yet unknown, and potentially destabilising consequences. The new language of "pensions promises" is particularly abstract; it does not sit well with existing pensions legislative concepts, nor with the flexibilities permitted by most schemes’ trust deeds and rules. Our clients will need legal advice to understand how their schemes should be categorised and how the rewritten legislation applies to them.

12. There may be unintended consequences particularly for those who have used more innovative benefit designs than "pure" defined contribution arrangements or "traditional" final-salary schemes. These will have been designed and their administrative arrangements set up with consideration for the current law. To change the law applying to them would be to pull out the rug from under them, with the possibility of both members and scheme sponsors being bruised.

13. Unless further Regulations are made, the Bill, in its current form, seems to categorise many existing schemes as "shared risk", thereby changing and increasing the governance and communication requirements they must comply with. Almost all defined benefit schemes include provision for the trustees to grant discretionary benefit increases, including: the large number of final salary schemes operating discretionary increases for pre 6 April 1997 service; discretionary increases agreed as part of a scheme wind-up; and more recent designs such as those with longevity adjustment factors. It might also include schemes that seek to mirror state/public sector pension schemes because of the way their normal retirement ages are linked to state pension ages. It is not clear to us that these schemes need different, or further, regulation. We also note that clause 5(6) of the Bill as introduced only covers cases where the scheme confers a discretion to vary the benefit. We suggest that is it extended to also cover cases where the scheme confers a discretion as to whether to grant any benefit.

14. If the intention is not to increase or change the regulation currently applying to existing schemes then the new legislation should be written so that it only applies to new schemes. Existing schemes might be allowed to opt-in to the provisions of the new legislation, and some might choose to do so – many others will be content to remain where they are.

15. Then, to the extent that the Bill’s reforms are needed to encourage new and innovative pension provision, that can take place, but without imposing increased and unnecessary regulatory burden on existing schemes.

October 2014


[1] Hansard, HC (series 5) vol. 585, cols. 201 and 244 (2 September 2014)

Prepared 22nd October 2014