The Great Debate UK
A call for a cross-party consensus on pensions
-Damian Stancombe is head of corporate defined contribution at Punter Southall. The opinions expressed are his own.-
Pensions were a prominent feature of the chancellors’ debate recently, and are becoming a key battleground in the run-up to the election. Perhaps more interesting for us, however, has been the reaction of UK plc to the pensions issue and any government-led ‘solution’.
Punter Southall recently undertook its annual Corporate Defined Contribution Survey 2010, one of the largest and most wide-ranging undertaken in its field. Responses were received from representatives of a diverse spread of over 330 companies, and considered all aspects of pensions, but focused on defined contribution in the UK and influencing issues: from the current and future impact of economic conditions to the far-reaching effects of planned pension reforms.
The respondents included some of the UK’s largest employers, including 24 FTSE 100 companies and the survey conveys an authoritative range of opinions reflecting the views of UK plc. It revealed a strong sense of dissatisfaction with politicians for their seeming inability to bring about positive changes with regard to pensions. The feeling was that any future political change would have little or no impact on pension legislation, for better or worse. This is borne out by the fact that 86 percent of respondents believe there will be a change of government at the next election, while 57 percent believe this will have little impact.
With only 14 percent of respondents believing a change in government will have a positive impact on pensions, we believe that this is a strong steer from the business community for government to establish a cross-party consensus solution. This is seen as essential to achieve stability for non-state pension provision and bring an end to constant damaging intervention arising from conflicting policies. Indeed this cross-party consensus may be even more important if, as some commentators have claimed, we may be heading towards a hung parliament.
Many companies are pleading for government to stop passing the welfare buck to them (essentially taxing them to provide it by forcing companies to make contributions to pension plans) and to stop legislating them to the point of distraction.
With employer duties and National Employment Savings Trust due to arrive in the near future, we asked UK plc for their opinions on the proposed changes. The recently announced NEST charges have come in for some criticism in the press for being grossly unfair. In reality, when compared to the pensions industry prior to 2001 and the introduction of Stakeholder Pensions or the cost of schemes in other countries such as the U.S., a comparative charge of 0.5 percent is actually very reasonable.
How will the budget play out?
-Julia Whittle is principal and head of international, Punter Southall Financial Management. The opinions expressed are her own. She will participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion. –
We would certainly expect Chancellor Alistair Darling to use this budget to make a strong statement ahead of the general election to try to repair public confidence, but this may be difficult without making the situation worse.
There has been huge speculation that the Chancellor will increase the rate of capital gains tax, from 18 percent to something much closer to the new 50 percent top rate of income tax but this is unlikely to yield huge revenues and would add to the hit on high earners.
Marginal tax rate increases would probably be a bridge too far but some tinkering around the edges is likely– for example tax disclosure arrangements could well be extended to cover “income to capital” schemes and maybe extending HMRC powers in relation to offshore accounts.
Rumours have been rife about tax free cash being taken away from pension scheme benefits. However, this is unlikely due to the hugely damaging effects of retrospective taxation.
Inheritance tax changes are unlikely for this budget although means testing for child benefits could be slipped through. Venture Capital Trust/Enterprise Investment Scheme relief could be targeted but certainly wouldn’t send out the right message for a Chancellor supporting economic recovery.
Finally, National Insurance was hit last time so Darling probably won’t try another rise quite so soon, though VAT is always a target.
Why are we just skirting around the edges here? Oh yes a genreal ellection. The new government, which ever one it is after May 6th will have to make some drastic cuts and increase taxes if we are going to have any chance of paying of this deficit. It’s no good ring fencing. The same problem happened in Canada a number of years ago. The Canadians just slashed evry government departments budget by 30%. Mind you they were not in a recession that is one of the worst in living memory.
Pre-budget report should simplify tax affairs for high earners
-Julia Whittle is principal and head of international, Punter Southall Financial Management. She will participate in a Reuters pre-budget live blog on Dec. 9, at 12 p.m. British time. The opinions expressed are her own.-
Management The attack on high earners has probably not reached a pinnacle and those earning above £100,000 have reason to be nervous in this current climate. The Pre-Budget statement so close to an election shouldn’t produce anything too drastic as there is little time to implement anything radical or complicated. However an attempt at some “vote winners” is a distinct possibility.
A ‘wealth tax’ has been rumoured, a potentially popular move and common across Europe, but it would be complicated to set up and would certainly deter people even more from coming to live in the UK and establish wealth here, so it is not particularly likely.
A windfall tax for a short term (maybe one year) on bonuses could be on the agenda.
IHT increases have been on the cards for some time perhaps for larger estates, for example a 50 percent rate on 1 million pounds perhaps which could be popular with grass roots Labour voters. There has been talk of an increase in the time required for lifetime gifts to become exempt – 7 years to 15 perhaps – but this is probably not exciting enough as a revenue earner.
Income tax The personal allowances for incomes of over £100,000 are unnecessarily complicated – some simplification would be welcome here but it is probably not a key item on the agenda.
Capital Gains Tax The issue of 18% capital gains tax has been discussed as a possible target for increases to bring it into line with the 50% top rate. However, this is again unlikely as it would be well out of line with other European models and not a huge vote winner, though further restrictions on adapting income to CGT rather than income tax regime are more likely. But there could be a restriction or removal in the carrying forward of losses!
Considering defined contribution pension pros and cons
-Damian Stancombe is head of Corporate Defined Contribution Pensions at Punter Southall Group. The opinions expressed are his own.-
Three things to keep in mind for defined contribution pensions:
Higher earners
Pension plans help build financial security in retirement, and in the face of a looming pensioner crisis the government continues its efforts to increase the number of savers. There is one exception: if you earn more than 150,000 pounds all bets are off.
In April 2010, we will see these high earners lose their tax-free allowance and suffer further through the introduction of a 50 percent income tax rate. A year later, an effective charge of up to 30 percent on all pension contributions will bring an immediate cost for a benefit realised later in life.
This substantial change to pension tax relief may dramatically affect the suitability of pension saving when compared with other investments and disengage the decision maker in the company from pension provision.
Employers would be well advised to ensure pension scheme members are aware of these changes, along with the thorough “anti-forestalling” rules already in place. They may also wish to review traditional pension provision as an effective reward strategy for key employees.
Why the bulk-annuity market won’t revive
- Richard Jones is principal at Punter Southall Transaction Services. The opinions expressed are his own. -
A bulk annuity buy-out is an insurance contract which allows a defined benefit pension scheme sponsor and its trustees to absolve themselves of their responsibilities in regard of the accrued liabilities to members.
During 2005 and 2006, the buy-out market saw new mono-line insurance providers challenge the more established and diversified market players such as the Prudential and Legal and General. Despite the attractiveness of certain aspects of this insurance product, the premium required makes buy-out too expensive for many pension schemes.
Successive government statutes establishing stricter regulation, more transparent accounting disclosures and substantial movements in asset markets have made defined benefit pension schemes an increasingly unwieldy and frightening animal for companies to manage on their balance sheet. Buy-out provides a means to remove this risk: reducing the likely volatility of contributions and the exposure to longevity and investment risk.
Further benefits from a company’s perspective are that insurance companies may potentially have more efficient administration systems, and lower investment transaction costs due to large aggregate fund sizes. From the member’s perspective, the credit rating of an insurance company and the stringent oversight by the FSA may provide a better guarantee of benefit promises being met, than had they continued to be sponsored by their employer.
However, the transfer of pensions risk to an insurer is expensive. An insurance company faces the very same risks as a sponsoring employer of a pension scheme, but is encumbered by additional regulatory constraints associated with operating within an insurance regime and the obligation to make a profit. As a result the cost of purchasing annuities has historically been prohibitively expensive to most.
To generate interest in the market some of the new participants priced aggressively. Legal and General continued to compete, whereas some of the other players such as Lucida, Rothesay Life and Prudential appeared to cherry pick deals. This led to deal volumes rising to 2.9 billion pounds in 2007 and 8 billion pounds in 2008.
The Pensions battleground: stalemate or truce?
-Simon Banks is a principal at Punter Southall. The opinions expressed are his own.-
This summer we have seen the closure of many “defined benefit” pension schemes, which provide benefits based on a formula linked to salary. They are closing because they are reliant on employer support and have either become too expensive, or have grown too large relative to the employer.
Most employees will probably outlast the business currently employing them, so a shift away from a pension model reliant on employer support may seem sensible to many. The problem is that “defined contribution” schemes, usually offered as a replacement, can be ill-suited to those lacking financial confidence.
The battleground between government and the pensions industry is therefore over “shared risk” schemes. These have been suggested as a middle-ground option that would be less onerous for employers and yet provide some useful guarantees to employees. The government regards these proposals as tainted by self-interest, and is optimistic about what member training and communication can do to improve ‘defined contribution’ schemes.
This stalemate, if it continues, will benefit nobody.
I think people want:
• To have a retirement income that is, at least, similar to their peers • One that is reasonably predictable, with regular updates as it builds up • A higher flat pension (with discretionary indexation when markets permit), rather than a low but fully-indexed pension • Clear communication of what is guaranteed and what is not
