Pickering Report - a simpler way to better pensions?

Overview

Alan Pickering's long awaited report on pensions simplification was published on 15 July 2002. It seeks to find ways to ensure more and better pension provision whilst recognising that a balance needs to be struck between allowing employers control over costs and ensuring that benefits meet a minimum standard. The government's response is expected some time in the autumn although possible delays have been rumoured.

Ten of Pickering's proposals are considered below (and incorporate feedback we have received from some clients).

The legal framework

Proposals

A new Act that would consolidate all existing pensions legislation. Each statutory requirement would include a statement of the legislation's underlying policy aim. Legislation should avoid unnecessary complexity and focus on objectives rather than process.

Comments

The usefulness of any new legislation would depend on who drafted it; pensions specialists should be involved from the outset. Stating policy aims sounds like a good idea, but could give rise to confusion where the stated policy and wording of the legislation are difficult to reconcile.

A new kind of regulator (NKR)

Proposals

The NKR would replace Opra and have a greater capacity to offer advice at all levels (including comments to the government on regulatory issues and draft legislation). The NKR's role would be more proactive than Opra's, being able to intervene in problem schemes in advance of any whistle blowing.

Comments

There has been some dissatisfaction with Opra whose remit is fairly focused on procedural issues and is not always able to give assistance when difficult problems arise. Therefore, some advisory function would probably be useful.

Codes of practice

Proposals

Where possible, primary legislation should set out principles and much of the detail should be provided by non-prescriptive, often voluntary, codes of practice. This would give a more flexible and adaptive system than at present.

Comments

Codes of practice could give rise to greater uncertainty for trustees about how to act in particular cases and uncertainty could in turn give rise to more litigation. There must also be some question about the extent to which less well run schemes whose members need the most protection would comply with voluntary codes at all. Finally, binding codes of practice are a back door form of legislation which should arguably be left to the government, not an unelected regulator.

Section 67 Pensions Act 1995

Proposals

Section 67 to be replaced by a broad statement of principles that allows for modification of schemes where overall replacement benefits are expected (but not guaranteed) to be equivalent in value.

Comments

There is a general consensus that the existing provisions are overly complex. However, the term "equivalent in value" could prove to be equally problematic, for example, a money purchase benefit could be said to be equivalent in monetary value to a final salary benefit, but carries with it a real risk that the member will not get benefits of an equivalent value at retirement. However, some change to section 67 is required if many of the proposals in the report are ever to go any further.

Contracting-out

Proposals

Simplification proposals include:

• introduction of a new reference scheme test;
• a mechanism to convert GMPs to reference scheme test benefits or protected rights;
• liberalising the form of the benefits that must be bought with protected-rights;
• removal of restrictions around the date when contracted-out rights are payable; and
• no requirement to provide survivors' pensions as a pre-condition for contracting-out.

Comments

There is a consensus that the current regime is too complex. However, many feel that more radical reform is needed, ending contracting-out altogether. On the proposal to allow conversion of GMPs, whilst this sounds like a good proposal, problems might arise where the GMP is a large proportion of the member's benefits and the member might be worse off as a result as, for example, benefits may be revalued at a lower rate.

Winding-up

Proposals

Statutory winding-up priorities to be retained. A new priority category to be introduced to protect those nearing retirement and priority to be given to indexation of pensions in payment at the date of wind-up over deferred pensions coming into payment later.

Comments

This will not simplify winding-up; it merely adds another complication. An alternative would be scrapping statutory priorities completely.

Vesting and transfers

Proposals

Immediate vesting of all benefits. Trustees to be allowed to transfer minimal benefits (suggested to be in the region of £10,000) to a "safe harbour" product if the member did not elect to take a voluntary transfer within 6 months.

Comments

It is hard to see how this fits in with the idea of legislative simplification. The idea of a "safe harbour" is a useful one, but given the problems finding vehicles to accept former spouses' benefits on pension sharing, it seems questionable whether it would be possible to come up with a suitable product. In practical terms, the impact of immediate vesting might be for schemes to introduce longer waiting periods (for example 12 months to tie in with the stakeholder requirements).

Communication

Proposals

Consolidation of disclosure requirements into one set of rules, based on broad principles rather than prescription. In particular, more limited information to be provided to members automatically and no prescriptive timescales to be imposed.

Comments

Clearly dropping existing prescriptive time limits would remove a compliance issue. However, it could present a problem for members of less well run schemes who might find it increasingly difficult to get any information at all.

Indexation

Proposals

Removal of statutory pension increase requirements (LPI) on pensions coming into payment in the future. Accrued entitlements to indexation on pensions not yet in payment could be removed where benefits of an equivalent value are provided.

Comments

Some estimates indicate that removing LPI could reduce employer contributions by as much as 25%. This is one of the few proposals which has genuine cost saving implications and possibly provides a solution for some employers/trustees/members looking for ways to save their final salary scheme.

Compulsion

Proposals

Employers to be able to make membership of occupational pension schemes a condition of employment.

Comments

It is hard to imagine that many employers would now wish to do this. There is a risk that some low paid workers could be worse off as a member of an occupational pension scheme than they would be accruing state benefits.

Conclusion

In any event, Pickering's proposals will need to be reconsidered in the light of the Revenue's review on tax simplification due out later this year.

For a full copy of the Report click here

For further information please contact Mark Atkinson on +44 (0)20 7367 2184 or at [email protected].