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Everyone needs a pension, but the issues surrounding the development of pensions legislation are varied and complex
How important is the move towards auto-enrolment in pensions?
James MacKenzie, group legal manager, Aegon: Auto-enrolment will be a once-in-a-generation game-changer for UK pensions. For the first time, every eligible employee will become a member of a worksite pension scheme and, unless they choose to opt out, will receive an employer contribution of at least 3 per cent by 2018. This will bring many millions into pension schemes for the first time.
Communications and media will be key to helping reduce the numbers who opt out. It’s also important that the reforms don’t damage good pension provision. We hope the Department for Work and Pensions (DWP) will carefully monitor any ’levelling down’ of contributions to the legislative 8 per cent minimum contribution by employers with existing schemes.
David Taylor, director of legal services, Pensions Protection Fund (PPF): In the current environment, any initiative that is aimed at encouraging people to save for their futures has to be a good thing. The PPF does not have a direct role in the introduction of auto-enrolment but, of course, some PPF-eligible schemes will be used for auto-enrolment purposes.
Alongside existing initiatives, this will be another factor encouraging employers and trustees to focus on all-important governance and data standards in those schemes.
Iain Naismith, senior manager in retirement income & planning, Scottish Widows: The need for auto-enrolment was shown by the failure of the stakeholder pensions regime to increase pension provision significantly among lower earners, particularly those with smaller employers. Most employers did the minimum in setting up a ’shell’ scheme with no contributions.
Auto-enrolment means employees will automatically have a pension with an employer contribution, unless they opt out. This should result in a step-change in pensions coverage, although that depends on effective policing by the Pensions Regulator and relatively low opt-out rates. If savings for retirement remain low, the next step may be full compulsion.
What will be the impact of last year’s Supreme Court decision in the Bridge Trustees case and the ’Pilots’ litigation?
MacKenzie: Houldsworth & Anor v Bridge Trustees Ltd & Ors has already resulted in legislation to amend the statutory definition of ’money purchase benefits’. The aim is to ensure the definition refers only to benefits where there’s no risk of a funding deficit, the concern being that the case would otherwise have taken certain hybrid benefits out of legislative protection for final salary benefits.
The Government intends to consult on further changes to ensure the new definition works properly. It is hoped that this will remove any remaining legal uncertainties.
The so-called Pilots litigation usefully clarified who was an employer in a multi-employer scheme for the purposes of the Section 75 debt provisions and scheme-specific funding requirements.
However, it has created uncertainty for some employers, who may have thought their liabilities had ended or who may now find they were not actually liable for a Section 75 debt they had paid.
Taylor: While the Pilots conclusions will no doubt be highly relevant to some of our cases, it’s the Bridge decision - and subsequent proposed legislation - that will impact the PPF more fundamentally.
The basic distinction between money purchase benefits and those that are not is critical in determining to what extent that benefit is protected through PPF compensation or Financial Assistance Scheme (FAS) help - and reclassifying one member’s benefits can have a radical effect both on that member’s payslip and on those of his fellow members.
It is critical to be able to resolve issues around this classification promptly to bring schemes through our pipeline and minimise distress and uncertainty for members.
Jane Mitchell, senior lawyer, Life Pensions & Investments, Lloyds Banking Group: The DWP has taken steps to introduce legislation that could mean the decision in Bridge clarifying what is and what is not a money purchase benefit is academic. A new definition of money purchase benefits is contained in the Pensions Act 2011 and further provisions will be enacted in regulations to ensure that benefits that may create a funding deficit may not be classified as money purchase benefits.
The changes will have retrospective effect and schemes may find that benefits previously considered as money purchase will not qualify as such. There could be significant implications for affected schemes, as scheme-specific funding and the employer debt framework would now apply to them.
The Pilots case highlights the importance of understanding which parties support a multi-employer scheme. It provided clarity on the interaction between the scheme-specific funding regime, the employer debt legislation and the scheme rules, but it does mean that employers who believed they had exited their pension schemes and were free of liabilities could find that is not the case.
How should the pensions industry handle the issue of data cleansing?
MacKenzie: It’s clearly important that schemes hold accurate data on members so they can pay the right benefit at the right time. Schemes come in many shapes and sizes - small and large, contract and trust-based, run by insurance companies and ’self-administered’.
The quality and formality of record-keeping can vary between schemes. As a life company, our record-keeping is fully systems-based, although we rely on employers and trustees to provide the raw data. We use automated links to payroll systems to minimise the risk of human error. We welcome the regulator’s focus on this area and are well-advanced in confirming the accuracy of records across all our schemes.
Taylor: Data quality has been a long-running issue for the PPF and we’ve always looked at ways of working with the industry to improve the data they hold about their schemes.
Unfortunately, our experience has shown that, while improving considerably, data quality is still not where we think it should be - and many trustees are failing to address the issue. This failure leads to extra costs for those who pay the pension protection levy, uncertainty for members and delays for us when seeing schemes through our assessment period. We want to work with schemes to adopt best practice but will also consider our own powers to support work being undertaken in this area by the Pensions Regulator.
Naismith: The advent of auto-enrolment increases the importance of holding accurate records for pension scheme members and requires more information to be retained. Many pension providers have already taken steps to improve the integrity of data held. However, there remains a great deal to be done and industry sharing of best practice will help improve standards further. The regulator is also likely to take an interest in schemes where data management problems are identified.
How do you see the landscape for pensions changing in the next five years?
MacKenzie: The most significant change will come from the pension reforms that begin to take effect for the largest employers later this year. Auto-enrolment will lead to major increases in the number of individuals saving in pensions, and to much more pension savings made through the worksite.
It is expected that most employers will use defined contribution (DC) schemes - both trust- and contract-based - to meet their auto-enrolment responsibilities. The Pensions Regulator wants to drive up governance standards to improve member outcomes and has published its ’Six Principles for Good Workplace DC’.
We’re already being consulted on further initiatives, such as how to address the issue of small pension pots that employees often leave behind when they move jobs. Both initiatives, along with the development of the National Employment Savings Trust (Nest) and new entrants into the market, will have a big impact on the pensions landscape.
Taylor: While there are no easy answers I hope the implementation of auto-enrolment will be a key step in a more general reinvigoration of occupational pension provision.
For the PPF, the next five years will see further substantial expansion. We anticipate our membership will rise to approaching half a million people and we’ll be managing assets of £20bn. By then we expect to have completed our transition tasks in relation to all or the vast majority of FAS schemes. So for us, the focus will be on ensuring we have the processes to deal with that volume efficiently. Finding robust solutions to the myriad legal issues that are thrown up will be a key part of that.
Naismith: We are in the midst of a period of unprecedented change in pensions, with auto-enrolment being accompanied by state pension reform, the European Commission’s White Paper on pensions and review of the Institutions for Occupational Retirement Provision directive, the FSA’s Retail Distribution Review and many other legislative changes and industry initiatives.
We can expect to see a leaner pensions industry, hopefully serving many more people than at present. There is also likely to be increasing differentiation between simple, low-cost options such as Nest and sophisticated flexible options such as self-invested personal pensions. The move away from defined benefit will continue, with more employers discontinuing future accrual for existing members.
2012 is a key year for the pensions industry, with a number of crucial changes being implemented. Pension providers and employers are grappling with a move to
auto-enrolment in pensions while scrutinising key recent judgments. This week’s panel debate the big issues.