Pensions Bill 2008: Still waiting for Westminster

Christopher Andrews analyses the current state of the protracted 2008 Pensions Bill

Government is always keen to point out when a piece of legislation creates 'consensus', and this is certainly the case with the latest Pensions Bill. Perhaps, though, the Government should ask itself why 'Pensions Bill' has become synonymous with 'uncertainty', and why the only consensus from the industry seems to be a general sense of uncertainty over the Bill's proposals.

Take Personal Accounts for example, the main focus of the 2008 Bill. No one in the industry appears to be gleefully singing its praises from the rooftops, the standard take being along the lines of ‘Personal Accounts could be useful if targeted at the group of people who are not saving’. This is quickly followed by a flurry of caveats, from the effects on small businesses, to the potential of harming existing provision, to the long-repeated theme of interaction with means-tested benefits.

A major problem, as John Wilson, head of research at HSBC Actuaries and Consultants (HACL), points out, is that while Personal Accounts may be good for people who aren't saving, the Pensions Bill does not provide sufficient incentive for employers to maintain better pension provision, and may in fact have the opposite intended effect. "Whatever ministers might say, there is still a real risk of employers currently providing better than Personal Accounts, levelling down to that government endorsed benchmark," he says.

And in terms of the national saving scheme itself, Mark Duke, a partner at Towers Perrin, forthrightly says: "There's a pretty good chance Personal Accounts won't work," pointing out that it is small businesses that will be most affected by the new regime come 2012, and they will find ways to claw back the money they are having to spend on pensions, perhaps by reducing future rates of pay.

"So net, I don't think anybody is going to be that much better off," he says, "but some really quite low paid people may find they just got less take home pay through the process."

There are other concerns with targeting, and that the Personal Accounts regime could damage existing provision if not implemented carefully. As Nigel Peaple, director of policy at the National Association of Pension Funds (NAPF), points out: "Personal accounts should be targeted at those parts of the workforce that don't have access to a pension. And there are references to targeting, but our concern is that this is actually carried through in practice."

Qualifying matters
In terms of the overall effects of the Personal Accounts regime on existing provision, arguably the biggest area of contention has been around qualifying earnings and exemption tests, particularly in terms of monthly reconciliation. The NAPF has estimated that schemes would incur costs of between £25,000 and £100,000 each to amend their scheme rules to comply with the regime, or alternatively could scrap their existing provision to avoid the inevitable complications.

It should have come as some relief then when at the end of July, Minister for Pensions Reform Mike O'Brien announced that he had "listened to concerns" and that the Bill was to be amended to account for this. "Employers will be able to use their existing contribution calculations where these provide equivalent or better contributions than the minimum set out in the reforms, when assessed over a period of up to a year," he said.

So, problem sorted then? Well, not really. "I am not convinced that the comments made by Mike O'Brien will make a significant difference," says Paul Marks, technical consultant at Gissings. He points out that while employers may be able to use their existing definitions, it suggests that they will still need to determine whether their basic pay definition produces a better outcome than using total earnings, which means that administrative headache hasn't gone away.

Jennie Kreser, an associate at law firm Thomas Eggar, agrees, and adds: "As ever, I suspect that the devil will be in the detail and unless the methodology is simple then this could be yet another 'own goal'," likening the Personal Accounts regime to that of the much unloved Stakeholder scheme.

Contentious powers
Apart from Personal Accounts, and various amendments including extending the Financial Assistance Scheme and banning employers from encouraging their employees to opt out of the company pension, the 2008 Bill is also providing for some handy new powers to the Pensions Regulator (TPR), which have drawn heated response, both from sections of the industry and the House of Lords.

Put simply, the proposals would make it easier for TPR to issue contribution notices (of which it has issued a grand total of zero to date) and financial support directives (of which it has issued one, to Sea Containers) by putting the burden of proof on the company in question that it has not acted in an untoward way in respect of its pension scheme. This is partly in response to the various new buy-out solutions that have been developed over the last year.

In the final stages of the Lords debate on the Bill, however, Baroness Noakes, a Conservative peer, argued that it was entirely foreseeable that the new rules would actually increase risks to members of pension schemes and of compensation claims on the Pension Protection Fund, while also increasing clearance applications to TPR at considerable cost to employers. This would "inevitably lead to a further hardening of view among managements of companies with defined benefit schemes".

And Baroness Noakes is not alone in her criticism. Clive Grimley, a partner at Barnett Waddingham, says that the new powers may be designed to protect scheme members, but warns that ever-increasing bureaucracy has the opposite effect, citing 'hearth taxes' introduced in the 17th century and the earlier 'window taxes'. "The result was that property owners reduced the number of fireplaces and windows in a house to avoid paying tax to the overall detriment of the inhabitants," he says. Comparable to the ongoing cull of DB schemes.

The NAPF's Peaple says that while it is right TPR should be proactive, the new powers could be quite disruptive in terms of corporate Britain. "We think it's fair enough for the powers to get wider but we actually think that business and industry need a bit more certainly. We're saying it makes sense to set down in the bill more specifically the circumstances in which these new powers can be reached."

Interestingly Towers Perrin's Duke believes that it might be in the interest of TPR for a bit of uncertainty to remain, creating a "climate of fear and concern" that in itself may modify behaviour, either in terms of what people actually do, or in terms of their desire to go to TPR in advance of doing anything. "This is regulation by influence rather than regulation by decree," he says.

Christopher Clayton, head of the pensions advisory group at Close Brothers, who was seconded to TPR for nine months in 2007, takes a softer view on the new powers, saying: "I'm not here to speak for the Regulator, but its mantra is that it is risk based and proportionate and I don't think anybody could criticise them up to now as being over-aggressive in terms of issuing contribution notices and financial support directions. I would hope that people would take comfort from that."

And this would appear to be verified by a spokesperson for TPR who says: "The Regulator's clearance process provides assurance that anti-avoidance powers will not be used in relation to a transaction or event. We use these powers proportionately and under current legislation can only use them where reasonable – this will still be the case under the amended legislation."

A Conservative issue
If it is unlikely that TPR will suddenly begin wielding its powers like an angry badger, at some point in the next two years there is going to be a General Election, and it is looking increasingly likely that David Cameron will be the new man in Number 10. So is it also likely that a Conservative government will see through the Personal Accounts regime? The general feeling is 'probably'.

Clayton points out Shadow Secretary of State Chris Grayling's doubts about Personal Accounts, particularly in terms of interaction with means-tested benefits. However, he says, as do most people in the industry: "My best guess is that the Conservatives will see what happens and how it develops."

Meanwhile, Thomas Eggar's Kreser says: "Many governments would be loath to face a huge bill for an initiative that is well on the way to fruition but then never gets off the ground when the plug is pulled at a very late stage."

This is particularly true considering the Conservatives' relatively light opposition to the details in the Pensions Bill in Parliament.

Irrespective of a future General Election, it is now unlikely that the Bill will receive Royal Assent before November, and there will certainly be another amendment or two thrown in for good measure.

And it is worth noting that the Pensions Act is likely to be retrospective to April this year – so the industry is currently working to a set of laws that haven't yet been agreed. Just a bit more uncertainty to keep with the theme.

- Pensions Age August 2008