 In an age of austerity, tax coherence, a balance in responsibility and changes to regulatory policy are key recommendations for the longer term success of pension plans
The pensions team at global legal practice Squire Sanders has published its white paper (which can be viewed here) on UK pension reform at the National Association of Pension Funds’ annual meeting in Liverpool. “Pensions in the Age of Austerity” draws upon on a two-part independently commissioned research survey of leading trustees, employers, actuaries and other pensions industry professionals, to examine the key issues affecting the affordability of pension plans. The research also examined how influential imminent regulatory change was on planning for pension design and future responsibility for retirement saving. The white paper also puts forward ten proposals to tackle the problems highlighted in the survey and ensure in particular the long-term viability of defined contribution (DC) pension plans.
Survey respondents singled out The Bank of England’s quantitative easing programme and consequent low gilt yields, employers’ budgetary constraints and proposed Solvency II regulation as significant current and future burdens on defined benefit (DB) pension plans. Respondents also identified three inter-related cultural aspects that could undermine the success of auto-enrolment on DC pensions: i) the ‘social security mentality’ of savers who assume that retirement is too distant a concern and/or should be taken care of by the State; ii) that pensions is too complex an issue to be understood by employees; and iii) the prioritisation of more immediate demands on income.
To enhance DC plans and provide greater stability for sponsors of DB plans, Squire Sanders’ pensions team has identified the consistency of fiscal policy, member education and governance as areas that all need reassessment. In the white paper Squire Sanders recommends ten proposals for consideration in further reform:
1. Stability and transparency in the principles governing tax reliefs for pensions – annual uncertainty before the Budget and frequent changes are a disincentive to savers.
2. A coherent approach to how the tax system drives demand for competing savings vehicles.
3. Early access, subject to appropriate controls to prevent abuse, to encourage current and future generations of savers – and enable competing costs eg of student debt or long-term healthcare to be budgeted for.
4. Government to address the relationship between pensions savings and funding of long-term care needs.
5. The Pensions Regulator should have a legal duty to take employers' interests into account when assessing funding and take a longer term macro-economic view.
6. The Pension Protection Fund’s rules for assessing contingent assets should be reassessed – the current demands appear too rigid and unreasonable in an age of austerity.
7. Statutory exonerations for employers when engaging their employees in pensions – employers should be able to explain and promote their own pension arrangements within the workplace without fear of litigation.
8. Benefit in kind tax relief should be increased for provision of financial advice to employees.
9. Financial education basics should be introduced into the school curriculum.
10. The responsibility of employers for DC arrangements should be re-examined.
Catherine McKenna, Squire Sanders’ global head of pensions, says:
"In this age of austerity, pensions savings is at a crossroads in the UK, with increasing liabilities and the new duty of automatic enrolment paving the way to a largely defined contribution pensions world. Our research underscores the parlous state of financial education. If the DC plan is the future, its success will require a balanced approach and collective effort by all stakeholders concerned, including the State and employers, to promote greater financial literacy and support more informed decision-making by employees.
“The rôle of employers is absolutely central to delivering good quality pensions and we believe employers need more help and encouragement via the regulatory framework.”
Clifford Sims, partner and investment specialist in Squire Sanders’ pensions team, says:
“To make the pensions journey smoother for all we need a more flexible and holistic approach to financial planning for individuals. Asking for the traditional stimulus of tax reliefs as an incentive to pensions saving is naïve; we need tax stability and a coherent fiscal framework which acknowledges lifetime financial needs.
“There are some easements that could be made to the regulatory framework to encourage companies who have chosen or more often have been forced to move from DB plans to DC back into an engagement with their workforces, as well as to alleviate some of their DB funding problems."
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