Ex-Pensions Minister calls for early rescue of funds
FORMER Pensions Minister Steve Webb says the Government should consider calling time on the worst ‘zombie’ pension funds and force them to join the Pension Protection Fund.
The PPF was created to take on funds from collapsed firms, but Webb said funds at struggling companies should be put into the rescue scheme before firms fail.
He proposed targeting funds with ballooning deficits where the sponsoring firm is unlikely to last the next ‘two or three years’.
The plan could save taxpayers hundreds of millions of pounds in salvage costs when firms go bust.
The fate of struggling schemes has been in the news since BHS collapsed with a pension deficit of £571million. The last store in London’s Oxford Street closed yesterday. Just four years ago the deficit stood at £450million.
Webb, now director of policy at life insurer Royal London, said a proposed inquiry by the Work and Pensions Committee should consider the mechanism, even if it is ‘politically unpalatable’.
Funds that fall into the PPF are penalised, because any members yet to draw a pension face a cut of up to 10 per cent in payouts.
It is understood the Pensions Regulator and Pension Protection Fund already have a list of firms with zombie schemes.
Last year, the Pensions Institute issued an alarming report which said that as many as 1,000 of the UK’s defined benefit pension schemes are at ‘serious risk’ of falling into the PPF. The fund is widely hailed as a success story of pension reform and manages schemes worth £30billion. It is funded by a levy on existing pension funds.
By handing the schemes to the PPF the deficits would be brought under control sooner before liabilities escalated, Webb said.
He added: ‘This is about those underfunded schemes where the sponsoring firm has no realistic chance of dealing with the issue. In that time any deficit will inevitably get bigger and bigger.’
WHICHEVER way you analyse it, Government policy on pensions is in a right old royal mess.
Take company pension schemes, once the pride of the Western world. A combination of lax regulation, low interest rates and frugal employers has allowed deficits on defined benefit work schemes to build to frightening proportions, a stratospheric £408billion at the last count.
These deficits, unlikely ever to be plugged, now threaten the pension benefits of hundreds of thousands of workers in the private sector.
Do they transfer their benefits out before their scheme goes belly up (not easy given the reluctance of financial advisers to sanction such a move for fear of being found guilty of pension mis-selling)?
Or do they stick, running the risk that their pension will not be paid in full when it becomes due? These questions will come to the fore as more schemes plunge into deficit – 300 in the last year alone – and others are folded into the Pension Protection Fund (a nursing home for broken funds where benefits paid out are limited).
The Government does not know what it should do to address this massive pension problem. Beefing up The Pensions Regulator’s powers has been mooted – giving it the right, for example, to veto takeovers that involve businesses with substantial pension deficits (BHS). But this seems like shutting the gate after the horse (Sir Philip Green) has long bolted. It also smacks of tokenism.
What is really needed is a regulatory regime that requires companies to fund their schemes adequately – rather than the current set-up where the regulator pussyfoots around, in the process letting most companies off with benign pension deficit reduction plans.
It is invidious that last year, 35 FTSE 100 companies paid out more in dividends to shareholders than the size of their pension deficits (source: AJ Bell). Workers should be given a fairer deal.
Certainly, what is not wanted, but which is where I fear the Government is heading, is a further dumbing down in the pensions promised from defined benefit schemes – with companies allowed to restrict the annual increases afforded to pensioners by using the lower CPI rather than the RPI measure of inflation.
If the Government allows companies to tear up their pension rule books, it sets a worrying precedent. What will be next? REFORM of the tax incentives for pension savers has been pushed deep into the long grass. That is the view of Steve Webb, former Pensions Minister in the Coalition Government and now director of policy at mutual Royal London.
Earlier this year it seemed that radical reform was imminent. But George Osborne backed away, fearing an almighty backlash from Middle England.
Webb’s view is that reform will be postponed until the launch of the Lifetime Individual Savings Account next spring (a vehicle designed to help people save for a first home or towards retirement).
Not that it will stop Philip Hammond, Osborne’s replacement, from tinkering with pensions in his autumn statement. Webb believes that pensions are an easy target for cost cuts.
So brace yourselves for the following: a further reduction in the lifetime allowance – the maximum you can squirrel away before the taxman comes knocking – from its present £1million; and a reduction in the annual allowance – the amount you can put in a pension – for many higher-rate taxpayers.
You have been warned. ONE of the few pension ‘success’ stories is auto-enrolment – a Government initiative designed to get more people saving.
Last week, The Pensions Regulator (in between pondering what to do about Sir Philip Green) announced that 200,000 employers had embraced auto-enrolment, in the process getting more than 6.5million workers to start saving.
A fantastic beginning, but there are troubles ahead. Pension provider Now: Pensions has just conducted research which suggests nearly a quarter of workers are likely to stop contributing if they are required to increase their contributions to the level laid down by Government (a minimum 5 per cent of ‘qualifying earnings’ from 2019 with employers topping up with a minimum 3 per cent).
Now: Pensions believes the Government should reconsider these contribution rates from 2019 so that employers pay in as much as workers. In Denmark, for example, the standard is for employers to contribute two thirds, employees one third.
Difficult to argue against.
If the Government allows companies to tear up their rule book what will be next?