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A cleverly designed package of reforms will still arouse the unions’ ire
From Wisconsin to Greece, pensions are being trimmed as governments try to get to grips with unsustainable state spending. In America and Britain a particular target is public-sector pensions, and the exercise is painful. On March 10th teachers, nurses and millions more learned that they would have to work longer before getting their pensions, as well as pay more towards them. Rumours of massive strikes are already rumbling. (Read More)
Tackling the Intractable
A cleverly designed package of reforms will still arouse the unions’ ire
From Wisconsin to Greece, pensions are being trimmed as governments try to get to grips with unsustainable state spending. In America and Britain a particular target is public-sector pensions, and the exercise is painful. On March 10th teachers, nurses and millions more learned that they would have to work longer before getting their pensions, as well as pay more towards them. Rumours of massive strikes are already rumbling.
After the huge expansion of state and budget under Labour, it was inevitable that Britain’s coalition government would ask public-sector workers to take some pain. The fiscal austerity plan set out by George Osborne, the Tory chancellor of the exchequer, last June entails a three-pronged attack on state employment costs, through a two-year pay freeze, job losses and pension reform. Of these, an overdue overhaul of overgenerous pensions has always had enormous potential for sparking a clash with the trade unions, whose power base is now in the public sector.
In a pre-emptive bid to head off trouble, Mr Osborne askes John Hutton, a former Labour secretary for work and pensions, to head an independent commission looking into the matter. Mr Osborne’s move was shrewd. Lord Hutton, a politician of impeccable Blairite credentials, could not be attacked as a right-wing hatchet man. Instead he would look for reforms that were fair to both taxpayers and workers.
The case for the sweeping changes he recommended this week is manifest. The costs of public-sector pensions have been ballooning in recent years. The benefits paid out from the five largest schemes (local government, the National Health Service, teachers, the civil service, the armed forces and others all have their own plans) have risen by a third in real terms over the past decade. As most are not funded, it is the taxpayer who has been picking up the growing tab. The value of the unfunded pension liabilities was put by the government actuary’s department at £770 billion ($1.25 trillion) in 2008; some reckon it would be around £1 trillion.
A particular concern is the widening disparity between public and private pensions. As private employers have woken up to the rising costs and big risks of providing final-salary schemes, based on years of service and end-of-career earnings, they have closed them first to new employees and increasingly to new accrual for existing staff. Pension provision through these defined-benefit (DB) schemes has been replaced by cheaper defined-contribution (DC) plans, in which workers build up their own retirement savings and bear the risk of disappointing investment returns, as well as the cost of living longer when they turn their pension pots into retirement income. By contrast, final-salary schemes remain alive and expensively kicking in the public sector.
That has caused a startling gap to open up in coverage. Only a third of private workers are now in an employer-sponsored scheme (and of these the majority are in inferior DC plans) compared with around 85% of the public-sector workforce, almost all of whom are in DB schemes. Even though public workers make up only a quarter of all employees (i.e., excluding the self-employed); 5.4m are building up pension rights through DB plans, whereas only 2.4m private-sector workers are doing the same.
While private companies have responded to the soaring cost of pensions, the public sector has been laggardly. The normal pension age, typically 60 across the public sector, was pushed up to 65, the usual private-sector age, under Labour – but for new entrants.Contributions by workers stayed stuck at levels (6.5% of pay, on average) which meant more of the cost of provision fell on the taxpayer.
Lord Hutton had set out some short-term reforms in early October. He advocated raising employee contribution rates (except for the armed forces, who at present make none at all). Mr Osborne adopted that policy in his spending review later that month, resolving to raise rates by three percentage points on average by 2014-15, starting in April 2012. The specific changes were expected in his budget on March 23rd, but have been delayed until June.
This week saw proposals for fundamental long-term change. Lord Hutton has rejected the most far reaching of all, to switch public employees from unfunded DB schemes to funded DC plans. One reason is that in the near term this would actually add to the budget deficit, as contributions were diverted from paying benefits to the new savings accounts. As important, such a change would provoke massive opposition from the trade unions.
But if the government is to continue to offer DB pensions, these must be radically reshaped to make them affordable in the longer term. Lord Hutton has grasped the nettle whose sting so terrified Labour. The retirement age, he says, must increase for existing employees, so that across the main schemes it will reach 65. Moreover, it must then be linked to the age at which public and private workers alike become eligible for state pensions. This is due to rise to 66 by 2020 (women’s pensionable age is rising from 60 to 65 by 2018, and will then be the same as men’s). Taxpayers will also be protected by “automatic stabilisers”, such as higher contribution rates if costs break through a fixed ceiling.
These changes, especially the later retirement age, will infuriate public-sector workers already angered by cuts to public services, but their anger may be moderated by another proposal: letting them keep the benefits they have accrued by the time they make the transition. These would typically remain tied to the final salary at 60, and only future benefits would be affected by the higher retirement age.
In another radical reform, Lord Hutton also wants to replace final-salary schemes with “career average” plans. Pensions would be based on average pay throughout an employee’s working life, rather than in the last lap. This change will annoy high-fliers especially, but will give those who plod at the bottom a better deal.
Conflict with the unions over these proposals is inevitable, though ministers are trying to get on the front foot with other promises to simplify state pensions and tackle the means-testing that deters retirement saving. But Lord Hutton has at least handed the government a cleverly designed package that may make opposition less bitter than it would have been.
The reforms will be painful but, as Lord Hutton points out, the higher pension age will in a sense just return the schemes to the 1980s, when public-sector pensioners could expect to spend a third of their adult lives in retirement rather than 40-45% as is now the case. He has given the government a fighting chance of sorting out a problem that has been allowed to fester for too long.
What does the new UK coalition government mean for investors?
The pension deficits of Britain's biggest companies have deepened over the past year despite the sharp rise in stock markets, new research shows.
The combined pension deficits of companies in the FTSE 100 reached £73bn at the end of April, up from £52bn a year earlier. For the FTSE 350, the deficit had increased to £88bn from £60bn. (Read More)
UK pension deficits deepen further
The pension deficits of Britain's biggest companies have deepened over the past year despite the sharp rise in stock markets, new research shows.
The combined pension deficits of companies in the FTSE 100 reached £73bn at the end of April, up from £52bn a year earlier. For the FTSE 350, the deficit had increased to £88bn from £60bn.
Unsure about your UK pension? Let us help you arrange an evaluation of your existing UK pension schemes.
In the first meeting of our new cabinet George Osborne told colleagues that the need to get the budget deficit under control 'overshadows everything'. Some spending cuts have already been announced (all ministers are taking a 5% pay cut) but the scale of our national debt means much tougher measures are needed to balance the books.
The preliminary coalition agreement published recently suggested capital gains tax will rise. The expectation is an emergency Budget before the end of June when further tax rises could be announced. So far here is what we know:
Capital gains tax
The CGT rate might rise from the current flat rate of 18% and the annual £10,100 exemption could be reduced. This means any tax shelters, such as ISAs, pensions (SIPPs) will become even more valuable. Within an SIPP all gains are tax-free.
Income tax
It looks likely the tax free personal allowance for those earning less than £100,000 will rise to £10,000 over time, but the 50% tax rate for those earning over £150,000 will remain.
Tax relief on pensions
The Tories are happy with the current system, whilst the Lib Dems want to abolish higher rate tax relief. We believe higher rate taxpayers who are considering making a pension contribution this tax year might want to bring forward contributions.
Act now - secure your tax shelters
We believe it is vital that investors organise their affairs as tax efficiently as possible. Changes in tax are rarely retrospective. No one can say for certain what will happen, but you might want to play it safe by making use of your SIPP allowances sooner rather than later.
It couldn’t be easier to open a SIPP.
Please note this email is not advice and once invested within a SIPP the money can’t be accessed until retirement. Before you invest please speak with one of our recommended SIPP experts.
UK pension deficits deepen further
The pension deficits of Britain's biggest companies have deepened over the past year despite the sharp rise in stock markets, new research shows. (Read More)
The pension deficits of Britain's biggest companies have deepened over the past year despite the sharp rise in stock markets, new research shows.
The combined pension deficits of companies in the FTSE 100 reached £73bn at the end of April, up from £52bn a year earlier. For the FTSE 350, the deficit had increased to £88bn from £60bn.
Unsure about your UK pension? Let us help you arrange an evaluation of your existing UK pension schemes.
Transfers between QROPS and other pension schemes where benefits are being taken and the member is under 55 may face unauthorised payment charges of up to 55% following a change in April’s Budget.
The minimum age at which benefits can be taken was raised from 50 to 55 with those taking benefit under 55 prior to April 6 2010 able to continue to do so, if they do not transfer. (Read More)
The minimum age at which benefits can be taken was raised from 50 to 55 with those taking benefit under 55 prior to April 6 2010 able to continue to do so, if they do not transfer.
If people taking benefits transfer into a new scheme, whether a QROPS, SIPP or any other pension, they may be penalised for making an unauthorised transfer and could be hit with a 55% charge.
Roger Berry, managing director of QROPS provider Concept Group, who is also chairman of Guernsey’s QROPS industry panel, said HMRC had sought to confirm their interpretation of the legislation and had confirmed a strict approach. Further, HMRC had not committed to when or if it would alter them nor pledged not to penalise people who make transfers in the meantime.
He said he had stopped accepting transfers that would be caught by the change – and urged industry colleagues to do the same – estimating the numbers of such transfers could run into hundreds.
“A lot of this will be down to interpretation but in our opinion this is unfair and unjust and until the legislation changes we will be able unable to accept transfers from those in drawdown aged between 50 and 55 until HMRC review this policy and amend the legislation.”
Pension Tracing Service - trace a personal or company pension scheme
If you've lost the details of a pension The Pension Tracing Service may be able to help by providing your pension scheme’s address. You can then contact the scheme and find your entitlement. Find out what The Pension Tracing Service can do for you and how you can contact them. (Read More)
