Pensions Update: The 2002 Green Paper

The pensions Green Paper which the Government had promised for "autumn 2002" was finally published on 17 December, with Parliament safely in recess and most commentators winding down for Christmas.

The Green Paper actually comprises two complementary papers, one produced by the Treasury and the Inland Revenue, and the other from the Department for Work and Pensions. We had been told to expect proposals for "simplification"; and to some surprise, a genuinely radical attempt to simplify the current pensions regime did emerge: not from the DWP however, but from the Treasury.

To take the good news first: the Treasury, to its credit, has gone against its natural inclinations and come up with a plan to sweep away the present eight tax regimes for different types of pension, and to replace them with a single regime based on the new concept of a "lifetime savings limit" of £1.4 million (to be index linked). There will also be an annual limit of £200,000 on "capital inflows" (whether from new contributions or from investment growth) towards this limit.

The new regime will allow "full concurrency": that is, the Revenue will generously allow us to belong to occupational pension schemes and personal pension schemes at the same time. It will also make it possible to draw benefits in stages, or while still in employment. The earliest age at which benefits can be drawn will go up from 50 to 55 (in steps, from 2010).

To widespread relief, the tax-free lump sum has been reprieved (based on 25% of the accumulated fund). In principle, this change could create both "winners" and "losers": more detail will be needed, but likely "losers" seem to be high earners with long periods of service under the old regime; and high-earning women with final salary rights (for whom £1.4 million will buy a smaller pension than it would for a man).

All of this is planned to come into force in April 2004.

Whilst the drive towards simplification is welcome, much of the detail remains to be seen, and there may well be scope for complexity to creep back in, particularly in the tricky area of preserving rights built up under current (and past) regimes. The Treasury paper expresses a general dislike of "grandfathering", but then makes some rather vague comments about the need for transitional provisions to protect the position of those who have built up significant rights under the existing regime. Herein, we suspect, lies scope for yet another layer of complication.

Set against the Treasury’s unexpectedly bold thinking, the DWP paper makes a rather sad contrast. It contains little new thinking, and even less that will genuinely reduce complexity (although a number of old ideas are recycled as if they were new, including one that is not the Government’s idea at all, but has been imposed on it by Brussels).

To take the most obvious areas of "over-complexity" which the DWP might have been expected to address:

• Contracting out: Apart from some minor tinkering, any genuine reform has been safely deferred by putting all the difficult issues out to further consultation. Thus schemes which were contracted-out before April 1997 will continue having to provide guaranteed minimum pensions for the foreseeable future; and even the reform of the notoriously over-complex anti-franking provisions, which was written into statute in 2000, will be delayed indefinitely.
• Winding-up priorities: The Government recognises that the current prescriptive regime can produce unfair results when schemes wind up and there is not enough money to go round; but again, the "solution" proposed is more consultation.
• Scheme modifications: The DWP recognises the difficulties caused by the rigid and over-prescribed nature of section 67 of the Pensions Act. It proposes some relaxation of the law. (We suspect this will, at the end of the day, make the position more complicated rather than less.)
• Preservation of benefits: The DWP proposes to abolish the present two-year qualifying period for entitlement to preserved benefits; subject to a right for schemes to transfer small amounts of benefit to a "safe harbour" product, such as a stakeholder pension.
• Replacement of the minimum funding requirement: The paper reiterates the existing proposals to replace the MFR with a "scheme-specific funding requirement", but without appearing to add any new detail.
• Member-nominated trustees: The DWP repeats its proposal to make it compulsory for all schemes to have a minimum of one third of the trustees selected by the members (ie abolishing "opt-outs"). The means of achieving this, unsurprisingly, is to be the subject of yet more consultation.

Turning to some other perceived "problem areas":

• OPRA is to be replaced by a "new kind of regulator" which will be "more proactive".
• There will be no change to state pension age, but there will be encouragement for more flexible retirement patterns (or to put it another way, there will be various inducements to work longer); and there will be legislation to outlaw age discrimination, including compulsory retirement ages. (This was forced on the Government anyway, by an EU Directive.)
• Protection of pension rights on business transfers: the DWP proposes more consultation!
• The vexed question of whether or not employers should be forced to contribute to pension schemes will be referred to an independent commission.

Whether any of these measures will arrest the flight from final salary pension schemes, or address the financial crisis affecting pensions generally, must be open to doubt. The crucial factor which provoked the current crisis – the change to the tax treatment of dividends, which has taken £5 billion out of pension schemes every year since 1997 – is not even mentioned.

Finally, a couple of interesting footnotes:

• A throw-away remark about applying a single set of investment requirements to all schemes, implies that the Government would ultimately like to do away with the special concessions available to small, self-administered schemes, and self-invested personal pensions.
• The DWP repeats an earlier threat of legislation to require all pension scheme trustees to have "appropriate investment expertise". This seems certain to discourage "lay" trustees from volunteering, and is consistent with the evident desire of the Myners Report to bring all pension schemes under the control of "investment professionals".